One of the first things I see newer traders struggling with and wondering about is how to trade the stock market like a professional. To trade the stock market like a pro there is one important concept market participants must understand. This concept is critical to people’s success and can lead to devastating failures if not followed. To trade the stock market like a pro, market participants need to first focus on analyzing the overall market, not stocks.
TRADE THE MARKET, NOT STOCKS!
What I mean by trade the market not stocks is that everybody should start their analysis with the big indexes and sectors, then structure their outlook on stocks accordingly. To trade the stock market like a professional, all market players need to be aware of critical price points on the S&P 500 (SPX). Most stocks are highly correlated to the SPX.
A COMMON MISTAKE IS TRADING A STOCK BEFORE BEING AWARE OF THE OVERALL MARKET TREND.
Trading against the overall trend of the market is something newer traders need to avoid. Initially, traders should focus on identifying the primary trend of the market. An attractive trade setup for a stock is a setup allowing an entry on a minor pullback against the primary trend of the market.
WHAT IS THE S&P 500?
The S&P 500 (SPX) is made up of the top 505 companies in the U.S. that are publicly traded, with market capitalizations (total size) of $2.53 billion or more. These 505 companies make up 80% of the U.S. stock market’s size.
The top 10 companies within the SPX make up 18.2% of the total index.
When beginning traders ask me how to trade the stock market like a professional, I always point them in the direction of seeing the entire market before focusing on individual stocks. The S&P 500 (SPX) is consistently on every professional’s radar.
ALL PARTICIPANTS NEED TO ASK THEMSELVES THE FOLLOWING QUESTIONS:
Where is critical support/resistance on the SPX? Where is SPX price relative to the 50 day simple moving average (SMA) and 200 SMA? Is the 50 SMA above the 200 SMA or below? Is the distance between the two expanding or shrinking? These are all important things participants should be asking themselves to begin seeing the market through the professional’s lens.
Using daily/weekly/monthly candlestick charts is an efficient way to analyze the stock market.
If there is one mantra a beginner must be aware of to know how to trade the stock market like a professional it is: