Trading the indices - No better than chance?

[babycakes]

When I started trading, I thought that using RSI or MACD would help me predict the times to buy and sell the FTSE. One morning, I woke up and realised that the index is just the sum of movements of individual shares - how could it be manipulated by traders. Surely, the FTSE or the DOW are simply a matter of randomness and cannot be predicted with any certainty.

If I make gains every day for one month, then surely I will make losses to offset those gains in future trading.

Is it therefore inherently safer to bet on the movements of shares or currencies where traders chart and may actually manipulate (unwittingly) its price?

 

[adamscj]

Is it therefore inherently safer to bet on the movements of shares or currencies where traders chart and may actually manipulate (unwittingly) its price?[/QUOTE]

You said it yourself - the index is the sum of the movement of individual shares. Now if you believe that the individual shares are subject to random movement then there might be some argument for the index to be the same, but many believe this not to be the case.

There are generally 2 schools of thought about prices in the market (whether its stocks, fx, commodities, indicies etc) - one says that prices are essentially the result of a random walk and cannot be predicted, the other says that past performance can be used to predict the future to some extent (e.g. trend following). The point is that it doesn't really matter which school you belong to, as you can make money with either view.

It's also dangerous to make statements like "If I make gains every day for one month, then surely I will make losses to offset those gains in future trading." If this was the case, then why not just trade the exact reverse of your strategy for the second month and double your profit?

I would say it's valid to trade on either the underlying shares or the index, depending on your strategy. It's definitely not true to say that underlying shares are somehow "manipulated" more than the index.

Hope that help, sorry if it comes across as a rant

 

[UKtradergirl]

Don't forget that the stocks that compose an Index are weighted in value too-- so although the FTSE100 looks like you are trading 100 stocks, in reality most of the movement comes from the top 5.

 

[KillPhil08]

+ sectors in general.

 

[tomorton]

Trading equities is inherently more risky, as the actions of just 1 or 2 individuals who may not even be major shareholders - the CE, Chairman or FD - can have huge and unpredictable impact on the share price. The Annual Report, or just a Trading Statement can make price rocket or bomb overnight.

Of course, this can be good if the you hold the appropriate position or have an appropriate order in place, but is simply impossible within the context of an index and such events are very very difficult to anticipate profitably.

The FTSE and the Dow do not move randomly, but timing trades on RSI and MACD will give an approximately random return. But don't dismiss the value of a road network merely because your car has broken down.

Anyway, the FTSE100 and Dow are such different animals its odd to see them paired in this way.

 

[foredog]

If the index movement is controlled by the underlying shares then it cannot be random, the lottery is random becuase it is 6 balls from any 49 the index is always the same balls (apart from reshuffles)

If there is bad economic news then most stocks will go down and so will index, how is that random?

Mark Douglas states that the ratio of wins to losses may be random but that doesn;t mean the actual movement is random

 

[bmaber]

When I started trading, I thought that using RSI or MACD would help me predict the times to buy and sell the FTSE. One morning, I woke up and realised that the index is just the sum of movements of individual shares - how could it be manipulated by traders. Surely, the FTSE or the DOW are simply a matter of randomness and cannot be predicted with any certainty.

If I make gains every day for one month, then surely I will make losses to offset those gains in future trading.

Is it therefore inherently safer to bet on the movements of shares or currencies where traders chart and may actually manipulate (unwittingly) its price?

If you had been watch all last week, the market could not break through 820 on the S & P. On Friday we had a awful jobs report, the market shot down to 821, I bought like mad, and bounce -- up it went. I am not sure the market is manipulated, but there is no doubt sometimes it behaves very predictably. There is also no doubt that market makers and big firm do play games that mess with us little guys, at least for the short term.

 

[Rhody Trader]

You fail to account for the fact that the Dow and FTSE (and many other indices) are in fact also traded in their own tright via futures, options, ETFs, etc. As such, the action of these indices are most definitely "manipulated" (poor choice of word, by the way).

 

[rnicoll]

When I started trading, I thought that using RSI or MACD would help me predict the times to buy and sell the FTSE. One morning, I woke up and realised that the index is just the sum of movements of individual shares - how could it be manipulated by traders. Surely, the FTSE or the DOW are simply a matter of randomness and cannot be predicted with any certainty.

If I make gains every day for one month, then surely I will make losses to offset those gains in future trading.

Is it therefore inherently safer to bet on the movements of shares or currencies where traders chart and may actually manipulate (unwittingly) its price?

It really depends on the logic you're coming to this from. It seems you're looking to out-chart other chartists, so you're directly competing on skill at technical analysis. On the other hand, I see technical analysis as a tool for analysing trader psychology.

Lets say a share dives down fast. A lot of people are likely to think "Hey, it's a good price now, lets buy", and it will probably bounce. That's not because they're doing technical analysis, that's just the nature of the market. Lets say then that the UK as a whole is seen to be doing poorly. Suddenly the entire FTSE 100 is mostly going down, and so it mostly underpriced, and the index will therefore dip and then bounce.

Personally I think neither fundamental or technical analysis works well alone. I've got an automated trader that's pure technical because it has to be, but doing this by hand I'd recommend that you use fundamental analysis to determine the direction the market will go in next, and technical to decide entry/exit points and confirm trades. I wouldn't use it as a decision maker for direction, for manual trading.

Oh, and random walk... utter drivel. Random walk would be truly random, while the market fairly clearly has trends. I've frequently heard of referred to as "Random walk around the currect price" - even more drivel. You can't randomly walk around a point, it makes no sense, it's not random if you're tethered! It may not be obvious that there's a pattern, and the non-randomness may be small enough to be unprofitable, but trust me when I say the market looks NOTHING like truly random.

 

[RedGreenBen]

Surely, the FTSE or the DOW are simply a matter of randomness and cannot be predicted with any certainty.

Don't worry about 'meaning' and look at the charts for a minute...
1. Prices trend.
2. Prices observe support/resistance.

Oops, just given away 83% of my profitable strategy.

Ben

 

[rathcoole_exile]

and mine you bugger !!

 

[rnicoll]

Don't worry about 'meaning' and look at the charts for a minute...
1. Prices trend.
2. Prices observe support/resistance.

Oops, just given away 83% of my profitable strategy.

Ben

Ha, but not mine!

No, wait, I'm not profitable right now.

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