Wednesday, November 27, 2013

Nasdaq at 13-Year High!

Nasdaq closes above 4000 for the first time in 13 years. This is the headline for many of the financial websites, newspapers, magazines, blogs...at least for today. Well no point discuss about technology stocks here in a futures trading blog. Today I am going to write about E-mini Nasdaq futures (NQ) and the Nasdaq Composite Index.



Nasdaq is trading above 4000 points but why E-mini Nasdaq futures Dec13 (NQZ13) is only hovering around 3450??? What could have been wrong in the market or calculations? Is Sept13 contract at such a huge discount to the cash market? Is there any arbitraging opportunity to profit from the price differences?


Before exploring about the potential trading opportunities, I want to know what is Nasdaq Compositie Index and E-mini Nasdaq Futures contract.

According to wikipedia,

The NASDAQ Composite is a stock market index of the common stocks and similar securities (e.g. ADR, tracking stocks, limited partnership interests) listed on the NASDAQ stock market, meaning that is has over 3,000 components. 

Then I looked for NQ contract specifications from CME website.

Did you notice that the underlying instrument for NQ is NASDAQ-100 Index and not the Nasdaq Composite Index that I've previously assumed it to be



According to wikipedia again,

The NASDAQ-100 is a stock market index of the 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index.

I made a blunder here. Ashamed to say that I trade NQ for such a long time but didn't know about the difference until today. This is probably due to the fact that I trade solely based on price action of a particular market without referring to either underlying instrument of the contract or fundamental information regarding the index.This applies to any indices futures trading which includes our very own FKLI and FBM-KLCI Index. My approach contradicts with many traders, who like to trade FKLI based on fundamental info of the 30 stocks in FBM-KLCI. They also like to compare FKLI and FBM-KLCI whether futures is premium or discount against the cash market. There is no right or wrong, as long as they are able to prove that their trading strategy is working and can produce consistent profits.

4 comments:

  1. Hi Bryan, I would like to ask u about trading NQ and other oversea instruments.
    You see, the "active" time of NQ is the New York session while the Asian sessions are considered overnight sessions. If I trade NQ based on positional trading and my signal is triggered during the Asian session, should I take the trade either to enter or exit ? Or should I only trade based on the New York session?
    Thanks

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  2. Hi Zac, nice to see you here.

    It depends on how you design your position trading strategy. May I know the reason(s) you want to skip signals during “inactive” sessions? Liquidity problems, random movements, market manipulations to hit stops or any other issues? In designing position trading strategy for products that run round the clock, you should have already taken into accounts various problems, issues, factors etc that may arising during trading operation.

    From my experience, not all products are “inactive” during off New York session. Gold (GC) and Crude Oil (CL) generate a lot of interest around the world and they are quite active during both Asian and European sessions. The fills are OK and slippage is considered reasonable. Please don't forget execution plays an important role also because a complete trading strategy should also include how to execute a trade based on entry and exit signals.

    In my position trading strategy, I take all signals regardless of active or inactive sessions or shorten sessions (like upcoming Thanksgiving holiday).

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  3. Thanks Bryan for the tips. :) You have always been generous when it comes to knowledge.

    ReplyDelete
  4. You are welcome. :-)

    ReplyDelete

FtR Trading System Performance Update: Jan to Jul 17

Rebounding from steep drawdown last month...