Getting our first edge in day trading

Trading Systems
1

For the US markets and the US dollar, Lets substitute the S&P futures and the EURUSD.

There is a big correlation between S&P futures and the EURUSD.

Analysis of these two instruments can give us and edge in our day trading right down to the stocks we are trading.

These two instruments are the leaders, what they do galvanises the market and gives it its underlying direction. At times they will trade together and at times they’ll diverge and go their separate ways. When they diverge then one very often pulls the other back in line.

By understanding which one is the strongest at any one moment and the true leader we can get the heads up on the next market direction. Of course stocks are governed by how the S&P futures behave and therefore by understanding its movement helps us with our day trading.

Imagine finding a momentum stock poised to soar and the S&P futures set to move the same way, odds are you are on a winner and can get a very good run. Imagine finding the same momentum stock and the S&P futures due to collapse. Then after the initial euphoria that stock is likely to run out of steam quite quickly and fade.

The biggest Dollar cross is the EURUSD so watching that and the S&P futures helps us understand what the US markets and the US dollar are doing and gives us the heads up on the next potential market direction.

In the chart example the EURUSD is above S&P futures are below.

The S&P futures had been very lacklustre from the day before on the left and really only moved up because of the EURUSD dragged it up. When the EURUSD lost its momentum and went sideways the S&P futures collapsed shown by its black arrow. We now know the market is inherently weak. The next day as the S&P futures carried on its overnight drop, momentum suddenly powered into the EURUSD and once again lifted the S&P futures plus of course many, many stocks. This is shown by the red arrows.

We now know that at this moment in time we have a weak market that is only being held up by a weak Dollar. (This is showing its hand by the movement of the EURUSD which is strong. i.e. a weak Dollar and strong EURO.)

If the EURUSD stalls or any bad news comes out which affects it then the market has relative weakness against it and will drop. At this moment in time the EURUSD is the leader and the S&P futures is following. This gives us an edge in understanding what the underlying sentiment of the markets is and helps us take our trading decisions.

In essence these two tell us the big picture that’s occurring at any moment in time. Some traders trade stocks but equally there are some that just trade these two big leaders. I’ll show you how to do it all.

2

Cool, which tools do you use?

3

Mostly I use tradestation.

4

I told you a while back the Aussie Dollar is strong and really that should be the one I traded.

I also told you that when everyone was screaming to go short the Yen pairs because of an over bought RSI and other wonderful ideas they thought of, I said it could quite easily be a pullback or a consolidation. Which it has turned out to be.

What they really should have said: “It was a take profit level from the last leg up”. But of course they haven’t been trading it so they wouldn’t see it that way.

What I’m saying now is that the momentum has waned in the YEN and we have to be selective. The weaker currencies are lagging on this move against the YEN and I’d leave them alone and focus on the strong ones. I jumped on the USDJPY because of the Dollars strength but the Aussie Dollar is stronger.

Why did I focus on the YEN again? Mainly because so many people were talking about shorting the YEN pairs. I was even showed a video of a T/A guru telling all his followers to short the YEN pairs. I smiled and thought I must remember do the opposite to that when the time is right!

All I need is timing, good management and the right YEN pair plus an understanding of the right time to jump off, the rest is pure profit!

When the time comes to short the YEN pairs I will be on it but as I said its not yet. No matter what analysis is done by over analytical people who keep telling us what we should do.

This is one type of reason why people know how to trade but can’t make money. All of us that do trade for a living end up bumping into the over analytical brigade but we manage to steer through and focus on our trading rather than listen to their views.