Date: 12/3/2021
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
We live in an interconnected financial world.
Each day before the NYSE opens, top traders and investors have already closely watched the close of the Asian and European markets.
Are they up or down, and how much will they affect the US market?
I’m a technical analyst, so I rarely make market predictions based on geopolitical events. It isn’t that these aren’t important for long-term investors, but as a trader, I prefer to play the chart in front of me, whatever the condition.
I’ll leave the foreign policy analysis and world events to experts like Dr. Kent Moors. He recently wrote a great piece on how economic data from Russia should be taken with a grain of salt.
This could be a game-changer for those investing directly in Russian companies or holding RSX.
As a technicals trader, my first and last activity is analyzing the market condition each day.
I want to know the market’s seasonal tendency and what’s going on beneath the price action.
My trading platform is set up to follow indices like TICK, TRIN, and PC.
These measures give me an overall picture of the market health, much like physicians at the hospital rely on heart rate, EKGs, and blood oxygen levels.
And though I don’t dive into European politics when I trade, I watch the German market’s performance via the ticker DAX.
I see it this way.
The Asian market affects the European market, which affects the US market where I trade. And the best proxy for European equities seems to be Germany.
Regional markets will show some divergence, but the ripple effect is a robust historical phenomenon.
Due to the high correlation between DAX and SPY, DAX can give you market insight before our trading day opens.
Take a look at this chart comparing the two over the past 365 days.
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Notice the symmetry between them?
Obviously, there are divergences between the price levels, and sometimes they move in completely opposite directions in the short term.
However, looking at the DAX close for the day can put your trading into perspective.
Let me restate that following foreign markets or historical trends is not a viable trading system.
I would never recommend you use these as a sole means of entering, managing or exiting trades. My subscribers and I have strict rules for that. That’s why so many of our trades win.
However, knowing the market context allows you to see the read the charts through a clearer lens.
At the beginning of each trading day, take a moment to consider the broad picture. Then hone in on your watchlist for opportunities.
If you’re efficient, you’ll already have alerts set to let you know when your favorite stocks line up with your favorite set-ups.
I’m an empiricist of sorts, and I always trade on what is happening rather than what should happen. So I may go into the day a bull and transform into a bear by market close.
It’s all based on what the market does.
Being married to your market biases can destroy you. Remember, we trade to be profitable, not correct in our assumptions.
What I want you to take away from this discussion today is this.
“Place your trades based on the chart you see, but never forget the bigger picture.”
Market conditions may not trigger a trade entry, but if there’s a lot of downside risk, you might very well size your positions smaller or wait a few days before you go in.
Always look before you leap.
Cheers,
Chris Hood
P.S. I’m a bit too old-fashioned to trade cryptocurrency, but that doesn’t mean you shouldn’t. Check out the new X-File piece for the latest on the crypto space, and be sure to subscribe to this free daily newsletter. Click here to find out more.
