3 - The Importance of Indexes and Beta Trading

8/7/2019 3 - The Importance of Indexes and Beta Trading

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Types of Indices :

Price Weighted Price is the only component to determining the value Capitalization Weighted Market Cap is another component to

overall value Dollar Index

Composition: Index Futures A futures contract that represents a particular equity

index (S&P 500, DJIA, etc.) and can be utilized as both a speculationand hedging tool.

Beta Beta Capital Asset Pricing Model Coefficient that is a pastindication of how volatile a single stocks returns are to an index. A

beta of 1 is similar to an index return while above offers potentiallymore volatility and reward.

TERMS TOKNOW:

The Trading Pitt 2010 2


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UNDERSTANDINGTHE BIGGERPICTURE

Key to finding the best setups is understanding overall picture.

Obviously the thing to do was to be bullish in abull market and bearish in a bear market Reminisces of a Stock Operator

3The Trading Pitt 2010


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EXPLAININGINDEXBEHAVIOR

Weighting can sometimes skew indexbehavior and lead to temporary correlations(AAPL is 13% + of QQQQ ETF)



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WHEN SHOULD I CATCH

BETA AND WHEN SHOULD

I STOCK PICK?

Correlation, Sentiment, and ImpliedCorrelation via option prices can giveyou clues when to stock pick or chasebeta


In low correlationenvironments pick stocks.High, go to the index

Implied Correlation is oftenhigher than realized and likevolatility not always goodforecasting tools.


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SIMULATION 1Intermediate Market ReversalMay 7th, 2010



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KEY POINTSFROMSIMULATION 1

MAY 7 TH , 2010

In extreme circumstances, you needto go off what market players arewatching. In this case the 200-Day MA



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Working on Two Different Time Frames Watching out for support on longer

charts though nothing in sight on 5 min Instead of hitting the bids, rather place

bids around that level for a low risk high

reward trade

Visualization exercises are good for both pre-market and post-marketsettings


VISUALIZATIONEXERCISE


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SECONDSIMULATION

/GC (GOLD)6/8/20106:00:00

Bear and Bull Trap Reversal



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KEY POINTSSIMULATION 2

Gold did not close above this level, andcaught all the breakout momentum traderswhen they ran into real selling orders.



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RANDOMSIMULATION

MARCH 31 ST ,2010

Rules: Buy or Sell the best/worst stocksrespectively on strength/weakness.No Fading!Ill be demonstrating dollar neutral spreading.



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Looking at futures compared to equities


ANALYSIS,COMMENTS,QUESTIONS?


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WHAT TOLOOK OUTFOR THISWEEK:

3 - The Importance of Indexes and Beta Trading

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