Are Stock Indices Different?

Discussions about the psychology of the markets and the masses as it relates to trading.
Post Reply
Forum Mgmnt
Roundtable Knight
Roundtable Knight
Posts: 1842
Joined: Tue Apr 15, 2003 11:02 am
Contact:

Are Stock Indices Different?

Post by Forum Mgmnt » Sat Oct 25, 2003 7:12 am

In another thread, in reference to PGO, a system developed by Mark Johnson, Chris Murphy wrote:I tested all 4 of Marks systems on 1 minute data from the S&P 500. None of them made a profit. I even tried fading the signals and the system still did not make a profit. The S&P is a random walking beast. I truely believe that because of arbitrage the S&P trades differently than commodities.
I have always believed that the indices trade very differently from the other futures markets. As a Turtle, we were given a choice as to whether or not we would trade the S&P 500 index. I made the decision not to trade the S&P 500 market using the Turtle rules, while many other Turtles did trade them.

My theory of the underlying reasons has two parts:
  1. Indices are not normal speculative instruments in the sense that their price movement does not come primarily as a result of the trading in the instrument or it's underlying index. The price movement of an index is an accumulation of the price movements in the components stocks.

    Since the price action of the S&P 500 is an averaging of many other individual markets, it won't behave the same as a market whose price action is determined solely by that market. The price movements of the strong stocks that cause a rise in the index are diluted by the weak stocks that are down during this rise, and vice versa. This causes a dampening effect on trends.
  2. The indices more purely demonstrate price movements resulting from investor psychology than underlying fundamentals. Individual stocks may rise for certain reasons, but the "market", being an almost wholly psychological concept, rises because of human sentiment based much more purely on feelings rather than logic. While this is certainly true of all markets, it is more true of the indices than other individual markets.

    From a trend-following perspective, the best trends are not those that move the most, but those that move the smoothest. It is the choppiness of the trends, and the number of false movements that determine the profitability of a market.

    It is my belief that smooth trends come when less individual traders, less weak hands, less amateurs (and I consider even most professionals who buy and sell stocks to be amateurs when it comes to trading) participate in the buying or selling that causes trends, the trend will be smoother. Amateurs tend to amplify the magnitude of the corrections, sometimes to the point where the trends don't compensate for the non-trending market losses.
The indices are a different beast, and I treat them that way. I never include stock indices in portfolios with other markets to be traded the same way as the other markets.

There are ways to make money with the indices, however, these tend to be shorter-term approaches with average trades of several days rather than several weeks or months.

Bernd
Roundtable Knight
Roundtable Knight
Posts: 126
Joined: Wed Apr 30, 2003 6:39 am

Post by Bernd » Tue Oct 28, 2003 7:36 am

:wink:
Last edited by Bernd on Fri Apr 18, 2008 11:08 pm, edited 1 time in total.

redbullpeter
Roundtable Fellow
Roundtable Fellow
Posts: 82
Joined: Mon Apr 28, 2003 9:12 am
Location: London, UK

Post by redbullpeter » Tue Oct 28, 2003 9:35 am

Hi,

I've been working on trading systems that primarily trade market indexes. Since I am using a spreadbetting account I am able to speculate on a far wider set of market indices other than S&P 500, FTSE 100 and the like. The three systems I've developed trade on average once a week per market index and most winning trades last about 5 days and losing trades less than 3. These are all based on using EOD data and do not normally involve intra-day trades.

I've started work on a system to trade commodities and other futures instruments and I, like you, have had to take a different approach as the methods I have applied on market indices do not work as well.

So I would agree with you in that market indices are "different". However, I can't comment on your reasoning.

Peter

Kiwi
Roundtable Knight
Roundtable Knight
Posts: 513
Joined: Wed Apr 16, 2003 1:18 am
Location: Nowhere near

Post by Kiwi » Tue Oct 28, 2003 4:08 pm

Bernd,

That was one of Vans better posts. He didnt tell you to buy a course or something. :wink:

Short term approaches are good. If you look at the european indexes on 1minute bars you frequently get trends that anyone trading oil or cattle would kill for. The trick is to build a system to take the profits.

You can trade the indexes long term but you have to be aware that they retrace 60-80% of most moves. What this means is that buying breakouts is expensive and painful so instead you have to learn how to buy retracements even at the risk of missing some moves. Obviously Peter has mastered this.

Good luck in all time frames.

John

redbullpeter
Roundtable Fellow
Roundtable Fellow
Posts: 82
Joined: Mon Apr 28, 2003 9:12 am
Location: London, UK

Post by redbullpeter » Tue Oct 28, 2003 6:01 pm

Kiwi,

The "secret" is in your observation. Think of retracements as mini-trends rather than a step backwards from the main trend, just a matter of scale really.

Peter

Nathan
Roundtable Knight
Roundtable Knight
Posts: 127
Joined: Sun Jul 13, 2003 3:52 am

Post by Nathan » Tue Oct 28, 2003 8:53 pm

I know that when I tried to shift from trading momentum stocks to the emini, it did not work out so well. I somewhat foolishly believed that my good results with momentum stocks meant I could trade the sp, and "figure" the market out while trading small size. What fooled me was looking at 1 minute sp charts. 1 minute charts in the sp can be very seductive. The mind starts churning about all those "great intraday" setups, and all that potential profit. If only...
In hindsight and with my very likely biased eye, a 1 minute sp chart looks like a long term chart you could trade using strategies developed on other markets. Anways, my plan to trade "small" till I fugured it out saved me from serious losses (I pulled the plug on emini without ever having increased size) If at the time I had understood about testing the way chris does, this lesson would very likely have been less expensive.

fliesch
Full Member
Full Member
Posts: 10
Joined: Sat Jan 10, 2004 9:36 am
Location: Switzerland

Post by fliesch » Fri Feb 06, 2004 12:19 pm

Very good posts!

I had similar experiences:
1. It was much easier to develop countertrend-systems than trendfollowing systems for stocks. But both work. It was easier to develop countertrendsystems for indices than for stocks (up to now - a fundamental filter is needed). Trendfollowing works better for stocks than indices.

2. I did not test intraday, yet. Will be interesting (so the first statement is related to EOD-systems).
3. If you go and look on the wealth-lab hompage (www.wealth-lab.com) you will mainly find countertrend systems - especially under the famous scripts. There has once been a thread on this topic on the WL-site...

BUT WHY ARE THERE THESE DIFFERENCES??
1. More "normal" people trading with stocks?
2. ???

Christian Smart
Roundtable Fellow
Roundtable Fellow
Posts: 50
Joined: Fri Apr 18, 2003 8:53 pm
Location: Huntsville, AL
Contact:

Post by Christian Smart » Fri Feb 06, 2004 9:23 pm

The following reply to Van's post is also illuminating:
http://mastermindforum.com/phorum/read. ... 929&t=5833

seldin
Full Member
Full Member
Posts: 11
Joined: Wed Oct 27, 2004 12:35 am
Location: New York

Re: Are Stock Indices Different?

Post by seldin » Wed Oct 27, 2004 6:00 pm

There are ways to make money with the indices, however, these tend to be shorter-term approaches with average trades of several days rather than several weeks or months.
I have a different view on this. For me, the key, is to develop systems that match my trading personality. For instance, I have a long term system that I use for SPY and the bulk of my pension.

I have a shorter term system, that trades variations of the $SPX, such $OEX, ES, $SPX and Futures Options. My trading account for short term, usually makes 2-4 round trips per month.

I think it's not that shorter term systems are better. Personally, (just my own testing), shows I get better results on longer term systems. So you see, we are both traders, yet have different view.

larryTAKEOUT@seldin.net

ES
Roundtable Fellow
Roundtable Fellow
Posts: 97
Joined: Mon May 05, 2003 1:02 am

The explanation is the difference

Post by ES » Sat Jan 29, 2005 10:57 pm

Here folks, lies the explanation which = the difference between trading stocks and commodities.

Smootheness. It exists in commodities while stocks wreak nothing but havoc and chaos. There's nothing smooth about trading stocks.

I deduce either short term compressed trends or longer term trends.

This is why my focus is here right now, because it offers a super duper challenge.

Ghostrider
Roundtable Fellow
Roundtable Fellow
Posts: 83
Joined: Thu Jul 31, 2003 11:46 am
Location: USA

Post by Ghostrider » Thu Mar 24, 2005 5:03 pm

My system works well on equity indices as well as commodities and other futures, and I'm fairly long-term (in my opinion). I trade each market 0 to 5 times a year, 5 being on the high side (whipped), the average is 1 trade per year.
GR
:P

edward kim
Roundtable Knight
Roundtable Knight
Posts: 344
Joined: Sun Apr 20, 2003 2:42 pm
Location: Silicon Valley / San Jose, CA USA
Contact:

Post by edward kim » Thu Mar 24, 2005 8:32 pm

Ghostrider wrote:My system works well on equity indices as well as commodities and other futures, and I'm fairly long-term (in my opinion). I trade each market 0 to 5 times a year, 5 being on the high side (whipped), the average is 1 trade per year.
GR
:P
I agree with Ghostrider.

I also test the equity index futures using as long a period as possible (20 years), and I use them in my hedge fund. Good trends (like anything else), good profits (like anything else) ..

Bull markets of the 20's, 80's, and NASDAQ in the 90's

Bear markets of the 30's, and 2000-x

it depends on how long-term or short-term you want to be.

One thing I do know:

if someone tells you "it HAS to be this way, it CAN NEVER be that way, and DON'T DO IT because that is ALWAYS WRONG" .. then maybe that person is not gong to help you expand your universe of possibilities.

Test it out yourself and bang it out - you might see something others do not. If you test your ideas thoroughly and you arrive at the same conclusion - then great! You now have more confidence in what you do.

Edward

sluggo
Roundtable Knight
Roundtable Knight
Posts: 2986
Joined: Fri Jun 11, 2004 2:50 pm

Post by sluggo » Fri Mar 25, 2005 12:49 pm

Here is a profitable long term trendfollowing system that trades stock indexes ONLY, using moving averages

viewtopic.php?p=13597&highlight=#13597

My guess is, the system performs pretty well on other futures markets too

Post Reply