Thursday, January 3, 2008

Index Technical Analysis

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Someone may ask "Why should I analyze indexes if I trade stocks only?”. By learning index charts and analyzing technical indicators to the indexes a trader may assume future market direction.

Thus, if after the index analysis a trader may predict where the tendency of the market is to be in the future, then this trader may more safely build his trading strategy. By having knowledge of the index trend a stock trader may decide if it is safe to open a trade or if it's better to wait for stronger indicators as well as the stock trader may manage the amount invested into a trade.

It's evident that a stock trader may benefit from the index technical analysis that goes along with the technical analysis applied to the traded stock from the basket of this index.

Below you will find some simple rules that use index analysis and could be added to any stock trading system:
- if the index analysis points on the Bull market and technical indicators applied to the stock suggest to see the stock traded higher, then buy;

- if the index analysis points on the Bull market however technical indicators applied to the stock suggest to see the stock traded lower, then ignore indicators and stay in cash or invest smaller funds;

- if the index analysis points on the Bear market and technical indicators applied to the stock suggest to see the stock traded lower, then sell;

- if the index analysis points on the Bear market however technical indicators applied to the stock suggest to see the stock traded higher, then ignore these indicators and stay in cash or invest smaller funds.

It is clear that index analysis should be included in each trading system even if it's not dedicated for index trading. In this case there should be fewer moments when a stock trader could be surprised why trading indicators do not work and why the traded stock moves in the direction opposite to analysis results.

Index analysis helps understand the general market trend that could not be received from the stock analysis. As a general rule, the market trend affects the stock trend and it's recommended to know the market direction before investing anything into any stock from this market.

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