Indices and price action

Hey guys, I'm new to the game. There is an aspect of technical analysis and indices which I am having difficulty getting my mind around.

If the price action of an index such as the DAX is driven by the movements of the basket of individual composite stocks then why does this not make it more random and harder to trade?

Coming at this from first principles I would have thought that the index would not exhibit trend lines, support & resistance etc as efficiently as individual stocks and yet people seem to trade the DAX, FTSE etc because of their technical behavior.

I am sure I am missing something. Thank you in advance.

The stocks in the index are all based and trade largely in the same economy. Significant economic and political factors affect all of the them in parallel, obviously not all equally strongly. e.g. central bank rate, exchange rates with other significant currencies, oil costs, imported commodity costs, employment issues, business policies of national government etc., plus the likelihood of change in various directions of each of these.

It is totally possible to use TA on an index, it won't be any more or less reliable than a single stock's TA.

Jack81 said:

Hey guys, I'm new to the game. There is an aspect of technical analysis and indices which I am having difficulty getting my mind around.

If the price action of an index such as the DAX is driven by the movements of the basket of individual composite stocks then why does this not make it more random and harder to trade?

Coming at this from first principles I would have thought that the index would not exhibit trend lines, support & resistance etc as efficiently as individual stocks and yet people seem to trade the DAX, FTSE etc because of their technical behavior.

I am sure I am missing something. Thank you in advance.

Click to expand...

Hi Jack,
New to the game but not to T2W: I see you've been a member since '09. Welcome anyway!

In addition to Tom's comments, there are those who will argue that there is a large amount of random movement in the markets which can't easily be tracked or predicted by TA or any other means. As you rightly observe, others take the opposite view. I think it would be fair to say that both camps would agree that indices are hard to trade. Indeed, the idea that one market or instrument is easier to trade than another is a fallacy based - for the most part - on an assumption made by novices, having seen numerous websites telling them that XYZ market (usually forex) is easy to trade. That said, without doubt, some markets and instruments suit individual traders much better than others for a host of different reasons. For example, personally, I find equities nominally easier than forex and indices nominally easier than equities.

Something that will help you get your head around the relationship between the cash index and the individual equities that comprise it will be to understand the relationship between the cash index and the futures. To do that, a good starting point is this Sticky: Essentials of Indices. Additionally, this video is worth a look:


Tim.

Thanks for the rapid replies. I shall explore that link.

Yes new to the game of actively trading. It has been a longstanding interest but after I joined in 2009 I initially went down a traditional portfolio building road. Gonna take it slow and steady.