Many traders are confused when the question comes to the indexes. The common question is "Why should I analyze NASDAQ 100 if I trade only MSFT (Microsoft Corporation stocks)?" or "Why should I bother about DJI if I trade C stock (Citigroup Inc)?†The answer is simple, the indexes reflect the general mood of the market and by applying technical analysis to the indexes a trader may predict where the tendency of the market is to be in the future. By knowing the general direction of the market, which could be received only from the indexes analysis, a trader may substantially improve the trading even if this trader does not trade indexes but stocks only.A simple trading system could be built on the basis of the index analysis and applied to the stock trading. By knowing the results of the technical analysis applied on the NASDAQ 100, a trader can make a more informative decision about trading MSFT †Microsoft corporation stock that belongs to the NASDAQ 100 index. For instance a trader may set simple rules for MSFT trading based on the NASDAQ 100 and MSFT analysis:If the results of the technical analysis applied to the NASDAQ 100 points to a higher possibility of the bull market and: 1. If results of the MSFT analysis predict up move (the same direction as NASDAQ 100 direction) then a trader may buy the stock; 2. If results of the MSFT analysis predict down move (opposite direction to the NASDAQ 100 analysis) then a trader may stay in cash and wait when both analysis points are similar in directionIf the results of the technical analysis applied to the NASDAQ 100 points to the higher possibility of the bear market and: 1. If results of the MSFT analysis predict down move (the same direction as NASDAQ 100 direction) then a trader may sell the stock; 2. If results of the MSFT analysis predict up move (opposite direction to the NASDAQ 100 analysis) then a trader may stay in cash and wait when both analysis points are similar in direction Basically, in a few words the system rules would state:†buy only when the results of the stock and the results of the index (in which the stock is included) analysis point on the up move for this stock and for the index†sell only when the result of the stock and the results of the index (in which the stock is included) analysis point on the down move for this stock and for the indexIt become evident that index analysis should be included in each trading system. By knowing the general market direction a trader should not be surprised why his/her stocks drops when all technical indicators applied to that stock point that it should be higher. If the market crashes down most likely your stock will be down as well. By using index analysis a stock trader can more safely trade the market, avoid uncertain trades, and manage how much to invest into a trade†Yes, it’s more complex to analyze stock and indexes, but if it would be easy then everyone would be a winnerâ€
Please Rate this Article 5 out of 54 out of 53 out of 52 out of 51 out of 5
Not yet Rated
