Judging Market Correlation

One of the most difficult tasks any trader can face is entering a short term day trade and having the overall market dictate the direction of the trade.

This can also have a positive effect, aiding your trade in the same direction of the market. Mentally we tend to only remember the trades that that the market “steals” from us.

The following is a list of key points that can center your thinking and guide your way through choppy intra-day markets.

Beta and Correlation

When I post my weekly watch list I use a filtering process that allows me to find stocks that act more independently then the majority of the other stocks. I’m also looking for stocks with higher beta to give me a better chance of capturing gain on an intra-trend. If these terms are foreign to you, take some time to brush up on the basics and see if they need to be added to your trading plan.

Create a new trading rule

One standard I had to enforce was to not let the major indexes affect my position. That means if I’m short and the market starts to pop long, I need to hold my ground unless my stop is hit. One exception I created was when intra-day index hits high of day or low of day levels. This will be the only situation where I’ll re-evaluate my position and consider exiting early.

Prevent Defense

Be intelligent and realize that there are certain index moves that will take almost every stock in the market with it.  Your goal should always be to execute high probable trades in terms of risk vs reward or in win/loss ratios. When you are weighing pros and cons, you have to be aware of major announcements, trading time frames, and any other risk measures to account for an overall possibility of market disturbance. Having an understanding of this can eliminate market noise and prepare you better for high probable trades.