Chapter 2 — The Market You Are Trading

1. Definition

Before any method, one question: what is actually changing hands when you press the button?

Three answers are common, and they are not the same thing.

A futures contract is a standardised agreement to exchange something at a set date, traded on an exchange, cleared centrally. When you trade NQ you are trading a contract on the Nasdaq-100 index. There is a real order book, a real matching engine, and your order joins it.

A CFD is a contract with a broker to exchange the difference in a price. There is no exchange and no central book. The price you see is the broker's price. It usually tracks the underlying closely, and "usually" is doing real work in that sentence.

Spot FX sits between the two — an over-the-counter market of dealers, with no single consolidated book, where your broker's feed is one view of many.

This book is written for index futures and their close proxies. The methods are stated for that market. They may transfer elsewhere; that is a question to be measured, not assumed.

2. Institutional reasoning

Why the instrument changes the answer

Everything in the volumes ahead rests on the idea that orders rest at known levels and that price is drawn toward them. That claim is only as good as the order book it describes.

On a futures exchange there is one book, and the highs and lows you see are where real orders were filled. On a CFD there is a broker's rendering of that book — close, but with its own spread, its own feed latency, and its own wicks that the underlying never printed. On OTC FX there are many books and no single truth.

So a level marked on a CFD chart is a level approximately where orders rest. Most days that approximation is harmless. On the day it matters — a fast sweep, a thin hour, a data release — it is exactly where your stop was.

The proxy problem, stated once

NAS100 is not NQ. US500 is not ES. They track, they correlate, and they are not the same instrument.

This matters more than it sounds, because it is very easy to build a model on one and trade it on the other without ever deciding to. You backtest on the data you can get, you trade on the account you have, and nobody ever writes down that these differ.

When this firm validates a model on proxy data, the report says so. When you backtest, record which instrument the data came from — not which one you intend to trade. If they differ, your result is a hypothesis about your instrument, not a measurement of it.

What to do about it

Trade the most direct instrument you can access and afford. Where you cannot — and cost, margin and location mean many traders cannot — trade the proxy knowingly. Label every result with its instrument, and treat a transfer from one to the other as a claim requiring evidence.

The honest position is not "CFDs are bad". It is "CFDs are a different instrument, and I have written down which one my numbers came from".

9. Cross references

Leads to:

• Chapter 4 — contracts, ticks and point values for the instruments named here
• Chapter 6 — the trading session, where exchange hours and broker hours diverge
• Volume 8 — backtesting, where instrument labelling becomes a rule

This chapter has no concept id. It establishes what the rest of the book is talking about when it says "the market".