Several useful points I learnt today

I found several useful points in my trading lesson today. They are some strategies that the teacher used to trade the Hang Seng index himself. Although they are by no mean completely new to me, I think it is worth mentioning here for the readers' benefit. However, for the sake of convenience, I will simply outline the main idea here and further data and evidence must be acquired through the readers' own research.

1. Interest rate difference is the leader of the markets.

The teacher showed us a chart of the interest rate difference between the 3 month and 20 year bonds, along with the Dow. It was found that the rate difference has a positive correlation with the Dow, and the rate difference always leads the Dow. The reason is that money is moved from the bonds to invest/speculate, driving short term rate higher and then also the stock prices. A very useful leading indicator for future direction in the long term.

2. Bonds rises faster than it falls, vice versa for stocks.

As many of you might have observed, the stock markets fall in the bear market faster than they rise in the bull market, almost every single time. This is because the bond market is a safer place (safe haven) while the stock market is a riskier place. When the big players are risk averse, they move their capital to the safe place very quickly, but when they start to get money out again, they are cautious and take their money out bit by bit, resulting in the difference between the speeds of rising and falling in stock markets.

3. Big moves do not happen in consecutive days.

When a big move happens on a day, usually it is followed by a quieter day, then the move continues the day follows. This is like a micro-cycle of price movement: move, rest, move, rest and so on. Therefore, when calculate pivot points (S1-S3, R1-R3), it is better to use the data two days before, if the previous day was a quiet day. This, of course, is not a rigid rule. The key is that the market usually has to "rest" after a volatile period.

4. Look at the options.

Options is used to hedge for unexpected moves for stock owners. When in a clear uptrend, put options are seldom transacted near the current price. However, when the market is becoming uncertain, more and more put options that are slightly out-of-the-money will be bought. At the very least, option volume will increase. This is a sign of reversal.

5. Correlations correlate with the trend.

Usually, in a clear trend, several markets tend to be correlated, like EURUSD and the S&P 500. The correlation breaks when the trend exhausts. Then, when they start to move in the opposite direction together again, it is a sign of reversal.

6. Every week has a theme.

This is certainly one of the greatest point every trader should know. Every weak there is a theme in the world of trading, just as there is one every now and then in fashions. If you understand that theme, you can predict where the market will go. This is why forex teacher Dirk du Toit called "listening to the market" and this can only be learnt through experience and careful studies of the difference aspects of the markets, like the points outlined above.