Let me emphasize again that you do not have to stop performing market-by-market technical analysis or to abandon the use of trend- following methods that have played a key role in technical analysis for decades. Many popular single-market technical indicators are useful to one degree or another to analyze internal market behavior. All I am suggesting is that these sorts of analytical tools can be made more effective when used in combination with intermarket data. It will give
TABLE 5.1 - THE SCOPE OF INTERMARKET ANALYSIS
INTERMARKET ANALYSIS WITH TREND-FORECASTING INDICATORS
SINGLE-MARKET ANALYSIS WITH TREND-FOLLOWING INDICATORS
Looks at multiple markets simultane- ously, analyzes their effect on a target market
Looks at one market at a time
Leads the market, pinpointing trading opportunities as they are about to unfold
Lags the market, causing traders to miss the start of new trends
Traders can enter and exit trades just as the trend is changing
Trades are often triggered several days after the trend has changed direction
Trends are identifi ed as they are devel- oping so traders catch a bigger portion of each move
Often gives back a large portion of prof- its, sometimes turning a profi table trade into a losing trade
Stops are placed based on how related markets are affecting the mar- ket being traded
Stop placements are determined by looking at the market being traded, often based on commonly used indica- tors such as trend lines, which tends to cluster stops near one another
False trading signals are minimized because the full picture is considered, not just a small piece of it
False signals are common during side- ways markets, resulting in frequent losing trades
T R A D E S E C R E T S
you a more comprehensive view of each target market from both an internal as well as an external perspective.
This is not an “either-or” choice. Intermarket analysis and trend forecasting approaches based upon it can be used as a confi rma- tion to single-market, trend-following approaches. With this broader framework, you can much more effectively identify and avoid mar- ginal trades because intermarket analysis builds upon the strengths of single-market analysis. By adding another dimension to the analytic framework, the behavior of each market can be analyzed both inter- nally as well as within the broader intermarket context of today’s global fi nancial markets, as Table 5.1 depicts.
A more quantitative approach to implementing intermarket analysis, such as I advocate, is not a radical departure from traditional technical analysis nor is it an attempt to replace it. Intermarket analysis is sim- ply the next logical developmental stage in the evolution of technical analysis when you recognize the global nature of today’s interdepen- dent, highly complex economies and integrated fi nancial markets.
If you need to dig a hole in the ground, you wouldn’t do it with a tea- spoon. Similarly, if you want to stir a cup of coffee, you wouldn’t use a spade. You would use the right tool for the job. Today’s interdependent, interconnected, global fi nancial markets require using the right tool if you really intend to be successful as a trader.
After reading my case for intermarket analysis, you may conclude,
“Okay, I agree with you that intermarket analysis should be the basis for analyzing today’s global markets, but if past prices of individual markets aren’t the complete answer, what do I use for data? And where do I get this information?”
The next chapter provides my proposed solution on what the best way is to implement intermarket analysis. It is not 100 percent perfect—no
approach to trading will ever achieve perfection, contrary to the hype you may hear. It is, however, a method that not only excels at fi nding reoccurring patterns and relationships between markets but also spots patterns within a single market that can be used to make highly accu- rate forecasts of market trend di rection. These forecasts can help turn lagging indicators into leading indicators, putting probabilities on your side and improving your odds of becoming a more successful trader.
Unlike years ago when the global economy (and globalization of mar- kets) fi rst began taking shape, today you would have to be completely isolated not to hear about globalization and how markets are affecting each other daily, if not more often. Now, it would be hard to fi nd a trader who wouldn’t agree that what happens in one market infl uences what happens in other related markets. By analyzing the effects of related markets—particularly futures markets, which are inherently oriented toward anticipating future price levels—even novice traders can fi nd early warnings of impending changes in mar ket direction.
These early warnings can be gleaned directly from watching key related markets.
Although it is easy to recognize the value of intermarket analysis intuitively, the big question is: how can an individual trader quantify these relationships so that he or she can apply the resulting informa- tion to tradable opportunities?
If you had the next day’s Investor’s Business Daily® or The Wall Street Journal® available to you every morning with your coffee—a one-day lead on everyone else—it wouldn’t take long to become one of the