Success in trading or investing is judged by the trading account or portfolio’s performance. This is how we keep score – the bigger, the better.
The way to achieve performance represents the trading or investing strategy. In the last decades, access to financial markets widened at unprecedented levels. Nowadays, anyone can buy stocks in their favorite company without even needing the capital to own one share (i.e., fractional share investing). Or any retail trader can sell or buy a nation’s currency on the back of his or her opinions. Finally, technical analysis evolved to such an extent that trading platforms allow the execution of complex strategies by simply monitoring technical indicators.
Regardless of the trading strategy used, some things remain unchanged. In trading or investing, just like in life, simple things work best.
When No One is Looking
We will start with Dow Jones yesterday’s example. This is a U.S. stock market index that has regular trading hours. During the trading hours, it is said that the “cash market” is open. By the time the trading hours expire, the futures market takes it from there. On any chart open at any broker, traders will see the continuous price action – futures continue from where the cash ended, and the cash continues from where the futures ended, and so on.
Dow Jones gapped higher at Monday’s opening. It did so on the back of the news that Brexit negotiations are back on the table. By Monday’s opening, we refer to the currency market opening and the Dow Jones futures.
However, when the cash opened, the selling started. The Dow Jones index ended the day “on its knees” – only bearish price action for all the hours the cash remained open. On its move lower, the Dow triggered bearish moves on EURUSD, GBPUSD, AUDUSD, as the trading algorithms buy and sell in a correlated fashion. Once the cash closed, the futures started grinding higher and higher, triggering a bounce in the USD pairs mentioned above.
What is interesting in this example is that this is common market behavior. In fact, as the chart above shows, the entire stock market rally since the March 2020 lockdown took place outside of market hours. More precisely, futures rallied, but the cash did not.
In other words, if you traded only futures, (i.e., buying the cash close at 04:00 PM New York time and selling the cash open at 09:30 AM New York time), a simple strategy like this would have netted much more than trading the cash only.
Even in trading, reading between the lines reveals incredible information.