Using Sectors to Gauge Stock Movement
06/30/2011 6:00 am EST
This real market example shows that daytraders can get valuable confirmation about individual stocks just by looking at the movement of the broad market and sectors.
I have often told swing traders, if you are looking for clues to the probable direction of your stock, look to the major influences. Those of you who have taken our courses know that we look to the markets and sectors to assist us in making trading decisions.
In fact, approximately 60% of a stock's movement on an intraday basis, or longer term, is directly related to the direction and movement of the broad market. Roughly 30% of the movement can be controlled by the sector the company belongs to. That leaves only 10% that can be attributed to the company's outlook and prospective business.
So, if we are planning to trade successfully, wouldn't it make sense to trade in the probable direction of the market, trade with sectors best poised to move in that direction, and trade the leading stocks in that sector(s)? Of course it would!
We look at the advantages of a top-down approach as we analyze students' actual trades and learn from what they did correctly and where they could have improved.
Looking at the following example, you can see how viewing the market and sectors can give you additional confirmation for your intraday trading.
The same techniques can be used to identify turning points and potential swing trading opportunities.
The lesson: Use the available information to your advantage. If you still have questions on how to do this, join a learning program and see these techniques not only explained in detail, but applied daily in the live markets. Until next time, trade safe and trade well!
By Brandon Wendell, instructor, Online Trading Academy