## Want to Make Money from the Market Index? First Understand the Rules of the Taiwan Stock Market Index Game

The Taiwan Stock Market Index is the weighted stock price index of the Taiwan Stock Exchange, abbreviated as "Weighted Index." This index reflects the overall performance of all common stocks listed in Taiwan and is the most important reference for investors to gauge the trend of the Taiwanese stock market and economic conditions. When you hear "Taiwan stock market today up or down," it refers to the changes in this index's value.

But here’s a question—how can a single number represent the entire stock market? The key lies in the **weighted calculation method**.

## The Logic Behind the Weighting of the Market Index: Who Has a Bigger Voice?

Imagine a school with two classes: Class 1 has 10 students, Class 2 has 20 students. Their midterm scores are 80 and 90, respectively. To calculate the average score of the entire grade, you can't simply add 80 and 90 and divide by 2 because the class sizes differ. Instead, you should weight them proportionally: Class 1 accounts for 1/3, Class 2 for 2/3. So, the grade average = 1/3×80 + 2/3×90 = 86.7 points.

The market index uses a similar logic, mainly through two calculation methods:

**Price-Weighted Index**: Uses stock prices as weights. The most typical example is the Dow Jones Industrial Average. Suppose the market has Stock A and Stock B, with base prices of 450 and 550, totaling 1000, and an index of 100 points. The next day, Stock A rises to 550, Stock B to 600, total price 1150, and the index becomes 115 points.

The obvious drawback: **Stocks with higher prices have a much greater influence**. This can overlook the movements of smaller stocks.

**Market Cap-Weighted Index**: Uses the market capitalization (stock price × number of shares) as the weight. This is the method used by Taiwan stocks and the S&P 500. For example, Company A has a stock price of 150 yuan with 2000 shares issued, market cap 300,000; Company B has a stock price of 5 yuan with 140,000 shares issued, market cap 700,000. The total market cap is 1 million, and the index is 100 points.

One month later, Company A's stock drops to 130 yuan (market cap 260,000), and Company B's stock rises to 10 yuan (market cap 1,400,000). Total market cap is 1,660,000, and the index is 166 points. This method better reflects the actual influence of large companies.

## Using the Market Index for Investment Decisions, Be Aware of These Pitfalls

**Advantages**: The Taiwan stock market index covers all common stocks, providing a comprehensive sample, allowing macro-level understanding of the entire stock market trend.

**But there are also many issues**:

🔸 **Overpowering influence of large-cap companies**: Market cap weighting causes giants like TSMC to sway the index's direction. Small and medium-sized stocks are often drowned out, and the performance of a few leading companies may mask the true state of the majority.

🔸 **Ignoring individual stock differences**: The index reflects an average, but individual stocks vary greatly. Some sectors or stocks may rise against the trend when the market falls, or underperform when the market rises.

🔸 **Industry over-concentration**: Electronics stocks dominate Taiwan's market, causing the index to overly reflect tech industry movements, while underrepresenting finance and traditional industries.

🔸 **Market sentiment-driven swings**: Speculative trading, breaking news, political factors, and other non-fundamental factors can cause overreactions, which are amplified in the index.

🔸 **Time lag issues**: The index is updated periodically, but market conditions change instantly. Relying solely on the index in a fast-changing environment may lead to delayed reactions.

**Conclusion**: Never rely solely on the market index for judgment. It should be combined with other technical indicators and fundamental analysis.

## Three-Layer Method for Predicting Market Index Trends with Technical Analysis

Technical analysis predicts future trends based on past price movements but cannot guarantee absolute foresight. Investors often adopt a "top-down" analysis framework:

**First Layer: Macro Market Analysis**
Use major indices like S&P 500, Dow Jones Industrial Average, NASDAQ for broad analysis.

**Second Layer: Industry Analysis**
Identify the strongest and weakest sectors within the market.

**Third Layer: Individual Stock Analysis**
Select specific targets within the chosen sectors.

Once entering detailed technical analysis, focus on these points:

**Trend Judgment**: Observe trend lines or moving averages. As long as prices stay above an upward-sloping trend line, with higher lows and higher highs, the trend is upward.

**Support Levels**: Price levels where buyers are willing to buy, preventing further decline. If the price breaks below support, it may continue downward, indicating weakening buying momentum.

**Resistance Levels**: Price points where upward movement often halts or reverses, typically previous highs. Breaking resistance signals a bullish trend.

**Candlestick Analysis**: Examine the relationship between open, close, high, and low prices. The highest point during the session reflects buying strength; the lowest reflects selling strength; the closing price is the final transaction price. A candlestick shows the supply-demand process—initial strong buying pushes prices higher, but sellers eventually take over, causing a pullback. If the close remains above the open, buyers are still dominant.

Be especially cautious: when "extreme news" (like an unexpected CEO death) or major political events occur, technical analysis may fail. Investors should wait for the market to stabilize before continuing analysis.

## How to Directly Invest in the Taiwan Stock Market Index?

**Mainly through ETFs**. These passive funds are managed to track the index without active trading, offering moderate returns with lower risk. Advanced investors can use Taiwan stock index futures and options for arbitrage or hedging.

**Pre-investment preparations**:

✓ Assess your risk tolerance and invest according to your risk preference. Never gamble everything on a single trade.

✓ Understand the components and weight distribution of the Taiwan Weighted Index. TSMC has a significant weight, so pay special attention.

✓ Be aware of trading hours. The Taiwan Stock Exchange operates from Monday to Friday, 9:00 AM to 1:30 PM (GMT+8). If you're outside Taiwan, account for time differences.

✓ Keep track of macroeconomic indicators both in Taiwan and globally—GDP growth, interest rate policies, inflation, etc.

On platforms like Gate.io, you can access data such as the highest price, lowest price, closing price, opening price, and trading volume within specific time frames. Time intervals can range from 1 minute to several years, depending on your analysis needs.

**Final reminder**: Use the market index wisely to gauge market conditions, but always combine it with other technical indicators and fundamental analysis. Be cautious, seize opportunities, and trade rationally.