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Advanced Market Perception

Q.O.D July 26

Q: Can I trade a different equity index future contract such as the Dow (YM) instead of the ES even though the room is focused on the ES?


A: Simply put, yes you can and I encourage you to try each and other sister futures contracts in simulation until you find the one with the right fit. Although they should all move in the same direction, do not expect that to be the case tick-for-tick. One thing to consider is that all will react differently based on the index components and their weighting. The Apple-effect and its weighting on the Nasdaq 100 (NQ) for example is a big factor when AAPL volatility is at bay or they have news specific to the company. The Russell tends to have a mind of its own at times but can also be considered in the alternative index camp. Here are my suggestions when contemplating such:


1.       Get to know the feel of each index in relation to your strategies.  For a variety of reasons, your rules, filters, risk parameters and overall trading plan components may have an overall better performance on one index vs. another. Keeping good data records in simulation is key to help make such a determination.

2.       Pick the one with the most overall strength/weakness that day.  Hindsight is always 20/20 but the overnight futures often provide insight as to the stronger or weaker market; at least up until the time of trade entry. The strategy here would be to take the weaker on a short trade and the stronger on a long. In the end, it’s your data and trade history that should determine which will provide you with the largest edge.

3.       Liquidity:  All of the big three (Dow, S&P, Nasdaq) futures all have a relatively high level of liquidity, however in the overnight markets may find the ES/S&P having the most and overall ease of flow. The Russell falls a bit shorter (although playable) in the overnights and this added level of liquidity risk should be considered in your trading plan.  

4.       Signal driven approach: The last option is to consider your entry using the index that best triggers your trading plan signal. For example, let’s assume you use a simple stochastic cross to enter and exit. If all of your other parameters meet your plan compliance, then the index that triggers first is the one that you would take. For my personal strategy, this makes the most sense. If these valid triggers are in my plan and have a historical and inherit edge, then clearly one must consider taking those where the market has provided edge. After all, that is our role as traders.