Lessons from the Pros


Follow the Market Leader

Those of you who trade the equity index ETF’s or even futures markets most likely know the frustration of having prices move within a penny of your supply or demand zone only to see them retreat without you being able to enter or exit your trade.  So, what causes this failure of price touching the zones or worse, makes prices just barely break a zone and trigger your stop before moving in your favor?  The leader can.

Free Trading WorkshopThere are three major equity market indexes: the Dow, the NASDAQ and the S&P 500.  Throughout the day and even in longer term multi-day moves, these indexes should move in unison.  They usually rise and fall together.  However, since they are not comprised of the same stocks one or more of the indexes may move faster in the trend direction than the others.

Take the current year drop in the indexes.  Looking at the following chart, you can see that QQQ, (the NASDAQ 100 ETF), is down more than the SPY (S&P 500 index ETF) and the DIA (Dow index ETF).  This means that QQQ is the leader of the downward price trend and is likely to signal trend changes when it hits demand.  The DIA and SPY could stop shy of their demand zones or even pierce them before the QQQ signals reversal.

Where to find and how to use the percent change chart on TradeStation's platform.

This knowledge is also helpful for traders and investors who are working with individual stocks.  Those of you who have attended Online Trading Academy’s Professional Trader Course know that we always have a chart of the S&P 500 or NASDAQ to view in addition to our stock chart in the class.  On average, 50-60% of a stock’s movement will be directly related to the movement and trend of the broad market.  30-40% of the stock’s movement will be influenced by the sector of that stock.  That leaves only 10% of influence from the company itself.  Knowing which index is the leader and when it is possibly changing direction is an edge you need when making decisions on your stock.

TradeStation’s software allows me to chart the four indexes in one chart.  This is something I have used extensively in the XLT programs to identify market trend and potential confirmation at supply and demand levels.  I use the “Percent Change” feature to compare all three indexes and easily identify the leader in the dominant trend.  I like to use the ETF’s: SPY, QQQ, DIA and can even add IWM to represent all of the indexes.  You could easily substitute the indexes themselves or even the futures contracts.  Since the futures are listed on different exchanges, you will have to adjust your chart to local time instead of “Exchange” time for them to overlay. You can see the completed chart example below.

The percentage change chart can show all indexes at once so you can see which is the leader and what impact it might have on the market.

You will need to begin with a chart of one of the ETF’s.  Right click on any open space on the chart and select “Percent Change Chart.”  Then “Enable” the chart.

How to set up the percent change chart on TradeStation

Then one by one you will need to add the additional securities.  Right mouse click on your chart and select “Insert Symbol.”

Learn TradeStation tools that will enhance your trading experience.

Type in the symbol you want to add but make sure that “Prompt for Format” is selected before pressing “Plot.”

Find out why your trades sometimes get stopped out just before or just as they hit?

Now you can change the color and thickness of the new symbol’s chart.

TradeStation offers tools you can customize to improve you trading results.

You will repeat the process for each symbol you wish to add to your charts.  Once you have the symbols added, you need to start or “zero” the study at a certain point.  In the case of daily charts, you can start from a major high or low that started the current trend.  For intraday charts, you can use the opening candle of the day.  You will need to right click your mouse on the time that you want your comparison to begin.  You then select “Percentage Change” as you did before.  This time you will select “Calculate from this bar” to start the study there.

How to tell which index is leading the market

As you can see from the following example, QQQ was the leader to the downside.  Prices reversed when QQQ hit its demand.  SPY also happened to be at demand at that time but DIA had slightly broken its demand as it waited for QQQ to tell it when to reverse.

Learn to use TradeStation at Online Trading Academy

This can be a handy odds enhancer while trading the markets and has helped many over the years.  To learn more odds enhancers and the Core Strategy, come visit your local Online Trading Academy center today.

Brandon Wendell – bwendell@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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