Module 1: Understanding Markets (Done)

Question 1

What is the DJIA?

Answer 1

• The DJIA is a price weighted average of 30 significant stocks traded on both the NYSE and the NASDAQ.
• The stocks in this weighted average are “blue chip” stocks such as John Deer, IBM, Caterpillar, etc.
• This is not something we are going to look at or pay attention to as day traders
• The reason is that it only represents 30 stocks and is not a big enough view of what the overall market is doing
• NOTE: Blue chip stocks are companies that are that are large, well-established, and financially sound. They tend to operate profitably in both good and bad economic times.

Question 2

What is the S&P 500?

Answer 2

• An index of 500 stocks, seen as the leading indicators of U.S. equities
• Widely regarded as the most accurate gauge of performance of “large cap” American equities
• It gives us a picture of what the overall market is doing
• This is something you should have up on your screen all day long
• Generally when this index is rising, we will want to be long stocks
• Conversely, when this index is falling, we will want to be short stocks
• NOTE: Large cap stocks are companies valued at $10B+

Question 3

How is the trend your friend?

Answer 3

• When a stock is going up, it is likely to continue rising
• When a stock is going down, it is likely to keep falling
• Never assume you are buying a base
• Thinking that you’re buying a base is known as “catching a falling knife” on Wall St.

Question 4

How should you as a day trader follow the S&P 500?

Answer 4

• Follow the S&P 500 with an ETF (something that looks and acts like a stock)
• The ETF that tracks the S&P 500 is the SPY ETF, sometimes referred to as the “spiders”
• An ETF is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund
• Unlike mutual funds, ETFs trade like common stock on exchanges
• GLD is the ETF for gold (it tracks gold)
• SVXY is an ETF that was developed as a way to hedge market volatility
• The SVXY can be used to indicate when volatility is low (the SVXY will rise) and when volatility is high (the SVXY will fall)
• Some important things to note… The VIX directly measures market expectations of near-term volatility. The VIX Futures Index reflects the prices of futures contracts based on the VIX, which can be influenced by factors such as time decay, market sentiment, and the cost of carrying the futures contracts. SVXY provides the inverse of the daily performance of the VIX Futures Index. When this index falls (indicating lower expected future volatility), SVXY rises, and vice versa.
• SVXY measures market sentiment

Question 5

What are the various exchanges you should be aware of as a day trader?

Answer 5

• NYSE: The largest equities based exchange in the world, based on total market capitalization of listed securities
• NASDAQ: The first computerized trading platform that lists roughly 3900 stocks
• AMEX: The third largest exchange by trading volume in the U.S.
• Almost all trading on the AMEX has to do with “small cap” (valuations between $300M - $2B) stocks, ETFs, and derivatives
• Most stocks with 3 letters trade on the NYSE
• Most stocks with 4 letters trade on the NASDAQ (something worth noting is that the NASDAQ is weighed heavily towards tech stocks)