Scalping NAS100 CFDs w/ US30 Futures as Leading Indicator

Food for thought

Sttategy Concept

This scalping strategy leverages sequential market relationships between the US30 futures, NAS100 futures, and NAS100 CFD markets. By observing sharp movements in the US30 futures, traders can anticipate similar reactions in the NAS100 CFD. The strategy is designed to take quick, small profits on the NAS100 CFD by capitalizing on these inter-market dynamics, especially in high-correlation periods.

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#### **Market Instruments**

- **Primary Trade Instrument:** NAS100 CFD
- **Leading Signal Instrument:** US30 Futures

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#### **Timeframes**

- **US30 Futures Signal**: 1-Minute and 5-Minute charts
- **NAS100 CFD Execution**: 1-Minute chart for precise entries

Given the rapid nature of scalping, this strategy relies on fast data analysis and execution.

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#### **How Each Market Follows the Other**

Understanding how each of these instruments influences the others provides insight into the strategy’s effectiveness:

1. **US30 and NAS100 Market Correlation**:
- The **US30 (Dow Jones Industrial Average)** and **NAS100 (Nasdaq 100)** represent key segments of the U.S. stock market.
- The **US30** is composed of 30 large-cap stocks across various industries, while the **NAS100** is focused on tech and growth companies.
- Despite these differences, both indices often respond to broader U.S. economic events and investor sentiment, causing them to move in similar directions.
- **US30 as a Leading Indicator**: The US30 futures often respond first to major economic news, reflecting institutional moves in large-cap stocks. When US30 spikes up or down, it frequently signals that market sentiment has shifted and that NAS100 may follow.

2. **Futures as the Primary Market Signal**:
- **Futures markets** (like US30 and NAS100 futures) are highly liquid and responsive, making them real-time indicators of investor sentiment.
- The NAS100 futures typically follow moves in the US30 futures, as the broad market sentiment is often reflected across major indices. This creates a high correlation that the strategy capitalizes on.

3. **How NAS100 CFDs Follow NAS100 Futures**:
- **CFDs (Contracts for Difference)** are derivative products offered by brokers that mimic the underlying index price, often tracking NAS100 futures.
- Since CFDs are broker-controlled, there may be a slight lag (milliseconds to seconds) in their pricing, particularly in volatile markets.
- This delay between futures and CFD pricing creates a brief “window” to capitalize on an anticipated movement in NAS100 CFDs based on US30 futures signals.

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#### **Entry Criteria**

1. **Identify High Correlation**:
- Confirm that NAS100 and US30 are currently moving in sync. High correlation typically occurs when:
- Broader market sentiment is uniform, e.g., due to economic news or central bank announcements.
- Both indices are showing similar momentum, either bullish or bearish.

2. **Monitor US30 Futures for a Spike**:
- Look for sudden, sharp moves in US30 futures (upward or downward).
- Confirm the spike with indicators such as:
- **Volume Spike**: A strong increase in volume adds reliability to the move.
- **Momentum Indicators** (RSI, MACD, or Stochastic): Confirm that the US30 futures are entering overbought or oversold conditions.

3. **Anticipate the NAS100 CFD Reaction**:
- If US30 futures spike, it’s likely that NAS100 futures, and subsequently the NAS100 CFD, will follow suit.
- Prepare to enter a NAS100 CFD trade in the same direction (buy if US30 spikes up, sell if US30 spikes down) to capture the CFD’s reaction to this delayed price movement.

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#### **Entry Execution**

- **Timing**: Enter the NAS100 CFD trade immediately after spotting the US30 futures spike.
- **Position Size**: Use smaller position sizes, as scalping relies on frequent trades and short holding periods, which helps control risk on each trade.

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#### **Exit Criteria**

1. **Profit Target**:
- Aim for a tight profit target, generally between **5-10 points** on the NAS100 CFD, depending on volatility. Scalping seeks frequent small wins, not large gains.

2. **Stop Loss**:
- Set a stop loss 5-10 points away from entry, ensuring a balanced risk-to-reward ratio. Tight stops limit potential losses in case of sudden moves.

3. **Time Limit**:
- Close the position if the NAS100 CFD does not react as anticipated within **1-2 minutes** of entry. Scalping relies on rapid market responses, and holding longer increases risk.

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#### **Risk Management**

- **Monitor Correlation**: Ensure US30 and NAS100 are moving together. Divergences can occur due to sector-specific news, so avoid trades when correlation appears weak.
- **Execution Speed**: Use a low-latency platform to ensure that you’re capturing quick movements within the “window” created by CFD lag.
- **Position Sizing**: Limit risk to **1% of capital** per trade. Scalping relies on frequent, controlled trades to manage risk.

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#### **Backtesting and Optimization**

1. **Historical Testing**:
- Test the strategy on historical data to verify its effectiveness and refine entry/exit points. Focus on volatile periods to understand how often US30 futures moves lead to predictable NAS100 CFD reactions.

2. **Automated Backtesting**:
- If possible, use automated tools to validate this approach on minute-level data. Optimize indicators, entry points, and profit targets based on results.

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#### **Advantages and Drawbacks**

**Advantages**:
- **Quick Profits**: Scalping allows for rapid, consistent gains when markets move as expected.
- **High Probability in Correlated Markets**: This approach can provide a reliable edge when US30 and NAS100 are highly correlated.

**Drawbacks**:
- **High Execution Demand**: Fast execution and low-latency data are essential to capitalize on short opportunities.
- **Correlation Risk**: If US30 and NAS100 diverge (e.g., due to tech-specific news), the strategy may yield losses.
- **Intense Monitoring**: Scalping requires constant monitoring, making it unsuitable for all traders.

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#### **Example Trade Setup**

1. **Market Setup**:
- Market sentiment is bullish; both US30 and NAS100 indices are positively correlated.
- US30 futures show a sudden spike upward with increased volume.

2. **Trade Execution**:
- Enter a Buy position in NAS100 CFD immediately upon observing the spike in US30 futures.
- **Profit Target**: 5-10 points.
- **Stop Loss**: 5-10 points below entry.

3. **Outcome**:
- Exit the trade as soon as the profit target is met or the stop loss is triggered.

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Tested today a bit

Do you have any data that the US30 and Nas100 lead CFDs?
I would be interested in seeing it, I play YM futures (US30) only if it out of correlation by a substantial amount from ES and NQ. I find if ES and NQ are up and YM is flat or negative, taking a long on YM is usually a good play. Shorts don't work as well.

Hi Machine

Sorry mate, it doesn’t work.

Believe me that every single New Future’s trader who opens up an account quickly thinks this is the Holy Grail method.
HFT trading firms used to have success with this method in the 00’s but the day has come where it’s all fucked up these days. The DOW does what it wants and you may find the NQ can lead the US500 by a few seconds SOMETIMES but generally it has been a losing strategy for about 10 years.

Better to use it as a LOOSE guide only.
Generally most Futures Traders stick to ES or NQ, many CFD traders prefer the DOW -

Bottom line is Future traders loose money quicker than CFD traders so be careful

Noted. Figured I'd write a quick write up to get some opinions. Consider it scrapped. Thanks

I'll concur with Rick M write up...but please do not dismiss the Dow Futures, incredible instrument per risk/reward and position sizing.

Been trading live 3 years, would not touch ES, ENQ and Gold with 10 foot pole.

Have to agree for the most part with RickM. I still dance with both girls most often. Like I always say, don’t want to let the trading day go to waste. One girl maybe giving it up while the other plays hard to get

My girl is always giving it up..she likes her man, me, and I always treat her with respect, the lady that she is...I try to squeeze out of her(profit) as much as I can, but only if she behaves herself well

Every trader will make this mistake by thinking the Dow is leading the NQ or vice versa, but they both have different stocks.

They would have to, for either of them to have any possibility of "leading" the other, presumably? If they both contained the same stocks, then they’d only ever be able to move in tandem, surely?

I've watched these two indexes for some time side by side to also "figure out" who's leading who.
IMO it was a waste of time.

Interesting, but really not my experience at all.

I joined ForexFactory only very recently, but have been testing this out, on and off (albeit not very systematically!) since MachineLearn kindly started the thread late last year.

I’ve found it both promising and productive, so far.

In my limited experience with it, the three really important points making it a profitable exercise have been (a) identifying times of high correlation and avoiding periods when correlation seems weak, (b) using only CME Dow futures (not any CFD version!) as the leading indicator, and (c) using an absolute maximum R:R of 1.0.

I sometimes go as low as 0.75 or even 0.7, i.e. I’m risking $100 to win $75 or $70. I know that’s not to everyone’s taste, especially among mostly forex traders, but it’s certainly possible to achieve very high win-rates with practice (and this kind of R:R is pretty normal, after all, for professional scalpers).

Sounds interesting that you've found some edge in that correlation/leading play between the NQ and Dow.
Very well done.

I now prefer a much different approach for the NQ.

It's pointless to use Dow as a leading indicator to NQ. You also need to test it from an aspect of seasonal tendencies, liquidity and fair value orders. I will talk of liquidity and fair value orders. Then you will know you can never use it as a leading indicator.

Seasonal Tendencies
Both markets have unique seasonal tendencies, and NQ will tend to fair worse than Dow during such times and may appear sluggish.

Liquidity Stops & Fair Value Orders Logic
Assume the market opens at 9:30 am. NQ already took London high but Dow did not and there are stops resting above for Dow but none for NQ. Assume there are buy stop orders and Sell Stops for Sell Traders for Dow but none for NQ. At the open NQ may be sluggish and Dow may shoot up to fill in the buy stop traders trading breakouts and stop losses for Sell traders and once they are filled and price drops triggering, their stops the collective stop orders being closed will trigger massive sells causing it to fall lower trapping you in buys and your stop being filled as well.

I don't. I use Dow futures as a leading indicator for Nasdaq CFDs. That's not exactly the same, for the reasons mentioned above.

I don’t doubt that “pointless” may be your experience, of course.

Mine, however, is different (fortunately!).

For me, it’s been working reliably enough, for long enough, to have been very beneficial. So my feeling is that Machine Learn - here as in some other threads - is doing a real favour for those at FF open-minded enough to think about his "food for thought".

I’m using this, as recommended in the title, to trade CFD’s, which aren’t in my experience too prone to "liquidity stops," "fair value orders" or any other ICT-regurgitated terminology.

I seem, somehow, to manage exactly that, but thanks for your concern - and have a good weekend.

The principle of using a CME futures data-feed as a leading indicator for trading CFD indices with a counterparty broker/market-maker is certainly a long-established and viable one.



Your observations there match exactly those of other traders I’ve known doing this profitably.

For people wanting to trade the indices using CFDs rather than trading the futures themselves, a CME data-feed is undoubtedly one of the most valuable little investments you can make in your business.

I really do mean "little". It costs only a few dollars per month, and all you have to do is self-certify, online, that you’re not trading futures with other people’s money on a paid, professional basis.

I hope that members here who are potentially interested in trying out the suggestions above won’t let klopp433’s comments put them off trying it.

I that case better trade futures too. Yes you pay commission but spread is zero or 1 if you use market orders.
With Oanda minimum 3.5 and with scalping it will add up.

I do, myself, but this thread’s about a method of exploiting the reality that under the specific circumstances mentioned above YM futures can be a leading indicator for NQ CFD’s, not for NQ futures.

I traded some time ago a similar approach , I watched Dax30 and the the Netherlands Neth 24, in the long run I saw that those European indices follow the same path - so I watched spikes or upmoves fro DAX30 and hunted for a delay of Neth24 moves in M1 than I took position of Neth 24 in the DAX move direction and speculated on
a " follower".
It really worked astonishing often very well,so I thought that's something like the holy grail -unfortunately it was not, cause sometimes Neth24 did not follow, but went minutes in the opposite direction ....so it's not a holy grail, , o.k.it sometimes works, but statistically the results were not enough to build an automatization on it.