There are many reasons why most people are not successful in the markets. In this article, we are going to talk about the importance of accurately determining the general stock market direction. The general market refers to the most commonly used market indexes. This includes the S&P 500, The Nasdaq Composite, The Dow Jones Industrial Average, and the NYSE Composite. The broad indexes will give you an indication of the approximate strength or weakness in each session’s overall trading activity. They will also give you an indication of new, emerging trends.
The reason it is important to know the current general stock market direction is because about 75% of all stocks follow it. Think of the general market as a large river with a strong current. When you buy stocks with the general market in an uptrend, it is like rafting down the river, with the current helping you along. When you buy stocks with general market in a downtrend, it is like rafting on this large river, but going against the current. Obviously, this is much more difficult. The point is that the odds are much more in your favor, when you only buy stocks when the general stock market is in an uptrend.
A great way to learn about the stock market is to observe and study the major indexes. After you acquire enough skill and knowledge, you will be able to recognize when the general stock market is changing at key turning points. This would include major market tops and bottoms. Once you can recognize when the general stock market has topped or has bottomed out, you have gained a tremendous advantage in the stock market and your overall trading will improve big time.
The skill you will need to learn is price and volume analysis. In other words, technical analysis or chart reading. Once you learn this vital skill, it will open a whole new world for you, concerning your trading and investing career. I recommend reading, “How to Make Money in Stocks”, by William J. O’Neil. This is an excellent book, covering all aspects of trading in the stock market.