Monday, March 23, 2009

Markets trade in sync

If you are used to watching multiple related markets, you will notice, that they tend to trade in sync. If the ES is going down, you expect the YM, the NQ, the major European markets to do the same. They usually do, but there are differences and you can profit from these.

First a word of caution: Never trade the lagging contract in the direction of the leading contract. There is a reason it lags.

Globetrader_00

ES is the leading contract in all my setups. I seldom trade it, I use it to define the major market trend.

Above you see the ES making a leg down. The CAC40 (french index) followed that last leg down, but the DAX, while trading to the downside is hesitant. That's a great example of a lagging contract.

Seeing this scenario the first impulse is: Ha, they missed it, for whatever reason they missed that downtrend in the market and are still holding support on Dax.

You sheep!

I have no idea why Dax is holding up, but that market has a lot of strength. Take a deep breath, you have missed nothing, instead pull up your trading charts for the DAX and wait for a signal to go long. The moment the ES turns, DAX will explode.

Globetrader_02

Of course, if ES takes another leg down, even the strong ones will follow, but that's what Stops are for.

2 comments:

FX said...

Very nice example. I'm usually "the sheep" and tend to go in lagging pair in forex and not the leading one. Many times it's not good idea. I never thought about something like this, to use that lag information if things reverse

newtonlinchen said...

Excellent. That's the way I trade brazilian index futures with an eye on the DJIA, S&P.

Sometimes brazilian index (Ibovespa) laggs on the downside and explodes to the upside, just as in your Dax example.

Right now I working in quantifying this approach and perhaps make it automated.