How to Trade Indices - Indices Trading Strategies

What are Indices

Indices measure the performance of a group of stocks. For example Standard & Poor's 500 Index is a stock market index that consists of 500 large companies which are listed on the stock exchange in the US.

Each index has its own technology of calculation and methodology, however it is important to pay attention to the relative change of an index, rather than the value itself.

KEY TAKEAWAYS

• Indexes measure the performance of a basket of securities that replicate a certain area of the market. Indices in financial markets are often used as a benchmark for evaluating investment performance.
• Before starting trading indices it’s essential to be familiar with most of the traded indices and their characteristics, as well as their volatility. Tracking the price movement of indices, knowing when to trade indices by using indicators, choosing the right trading strategy and setting stop and limit orders.
• Choose the right broker to trade with.
• One of the biggest advantages of trading indices using CFDs is that CFDs allow you to profit in both rising and falling markets.

Types of Indices

Index is a method to track the performance of a group of assets in a standardized way. Indexes measure the performance of a basket of securities that replicate a certain area of the market.

Index could be broad-based that captures the entire market, or more specialized - indexes that track a particular industry or segment. Depending on different methods of calculation there are several types of indices. For example:

• Types of indices by weighting method - Stock market indices could be segmented by their index weight methodology, or the rules on how stocks are allocated in the index, independent of its stock coverage.

  For example, the S&P 500 and the S&P 500 Equal Weight both cover the same group of stocks, but S&P 500 is weighted by market capitalization and S&P 500 Equal Weight is an equal weight index.

• Types of indices by coverage - The coverage of an index is the underlying group of stocks, typically grouped together with some rationale from their underlying economics or underlying investor demand, that the index is trying to represent or track. Traders can speculate on the rise or fall in index prices without taking ownership of the underlying asset using Indices CFDs.

  World Indices CFD is a form of Contract For Differences (CFD) that allows investors to track and trade the underlying index such as Hong Kong Index and S&P 500 index, although the prices may differ from the actual index levels.

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Most traded indices

When we say “the market has reached all time highs” or “the lowest point in the last quarter,” it refers to the value of the index. Indices represent the value of a group of public companies.

Indices are a popular investment option as they offer high liquidity, tight spreads and smooth charting patterns. Here are the main world indices:

• S&P 500 - is a stock market index comprised of 500 large companies listed on stock exchanges in the United States, one of the most commonly followed equity indices. The S&P 500 index is a free-float weighted/capitalization-weighted index.

• Dow Jones Industrial Average (DJIA) - is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the United States. Although the DJIA is one of the oldest stock indices, it is not considered an adequate representation of the US stock market.

  The DJIA includes 30 large companies because of the lower number of American stocks during the late 1800s (index's creation). DJIA is weighted by stock price, unlike later stock indices which use company value.

• FTSE 100 - informally called the "Footsie", is a share index of the 100 companies listed on the London Stock Exchange with, in principle, the highest market capitalisation. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group.

• Nikkei 225 - usually called the Nikkei or the Nikkei index, Nikkei measures the performance of 225 large, publicly owned companies in Japan from a wide array of industry sectors. The Nikkei index is updated every 15 seconds during trading sessions, starting 2010.

• DAX 30 - is a stock market index comprised of the 30 major German blue chip companies ( A blue-chip stock is a huge company with an excellent reputation. These are typically large, well-established and financially sound companies that have operated for many years and that have dependable earnings, often paying dividends to investors) trading on the Frankfurt Stock Exchange. because of its small company selection (30) it does not necessarily represent the vitality of the German economy as a whole.

How to trade indices

Traders can open short or long positions and make a profit from it, if they feel (based on proper technical and fundamental analisis) index will fall or rise. These financial instruments let traders profit from indicies's movement.

1. Choose How to trade indices

CFDs are the most popular way of trading indices. World Indices CFDs allow trading of leading stock exchanges. The price of instruments is expressed in the local currency of each particular index. There is a way to trade indices using CFDs in IFC Markets:

• Continuous Index CFDs - is formed on the basis of two instruments - the stock index and the nearest futures contract on this stock index. Continuous CFD does not make any sharp fluctuations or gaps.

2. Open a Trading Account

You can open trading account with IFC Markets and start indices CFD trading with Us.

3. Choose the Index you Want to Trade

Choose to trade indices that most suit your knowledge of the field. It could be volatile indices that are composed of a lesser number of companies, hence index fluidity is high, or S&P 500 with more predictable swings (in comparison with DAX30 for example). And based on your choice of index apply trading strategy.

4. Follow Indices Prices movement

To make an informed decision, you need to follow the indices price history chart, as well as live indices quotes, and conduct technical analysis.

5. Know When to Buy and Sell Indices

After making through all the steps mentioned above you should have formed knowledge when to buy or sell indices, whether you are trading indices using CFDs, or are you going to go long or short, depending on market’s volatility and and time of day (usually in the morning, market volumes and prices go wild, since opening hours are when all of the events and news released) which index to choose, and what trading strategies are you going to apply.

Here are four most common indicators to help you learn when to buy or sell indices:

• Moving Averages - technical analysis tool that smooths out price data by creating a constantly updated average price that effectively eliminates any random price fluctuations. The Average can be taken for a specific period of time a trader choses.
• On-Balance Volume (OBV) - the indicator measures cumulative buying and selling pressure by adding the volume on "up" days and subtracting volume on "down" days.in essence the volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.
• Relative Strength Index (RSI) - is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the Relative Strength Index is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend.
• Moving Average Convergence Divergence (MACD) - indicator is a momentum oscillator primarily used to trade trends. It appears on the chart as two lines which oscillate without boundaries. The crossover of the two lines give trading signals: bullish or bearish.

6. Fix Your Profit

Stops and limits are essential tools for managing your risk while trading indices, in other words helps managing your profit and loss.

• Stop order - will close your position automatically if it goes to a less favourable level than the current market price,
• Limit order - will close your position automatically if it goes to a more favourable market price.

Indices trading strategies

When choosing indices trading strategies it's important to have all the information in hand, not to mention, knowing most used ones. Below we will introduce to you the best trading strategies.

Important to remember that the best strategy is the one that suits your plan. Hence each trader needs to have a trading routine that fits the purpose. Usually, “trial and error” method brings to light the right trading strategy.

• Day trading indices - a method of buying and selling indices within the same day. The idea is to close all open positions before the market closes, which is advantageous since holding positions overnight is fraught with added costs and risks. Disadvantage though is that day trading is extremely time-consuming.

  Traders need to monitor the markets and be ready to make quick decisions if and when a price moves in a certain direction: price changes typically result from economic or geopolitical news, so staying on top of current events helps better understand why a price has moved, and even to anticipate the short-term trend, thus letting traders make more informed decisions when to buying or sell an index.

• Corporate financial announcements - due to the impact of some large individual stocks on the index, indices prices may be affected by earnings reports and key announcements. Especially when indices consist of a small number of companies, then the movement of one company can affect the entire index. Like in DAX 30 or Dow Jones, for example when Apple stocks rise we can expect Dow Jones to rise as well.
• Breakout trading - is used to take a position within a trend’s early stages. A breakout is a price moving outside a defined support or resistance level with increased volume. A support level is where a share price has shown a tendency to bounce back after falling and the resistance level is where the price has shown a tendency to rebound towards the downside after the price has risen.
• Scalping indices - is an ultra-short-term trading strategy where you aim to open and close trades within a few minutes. In other words, the aim is to make small frequent profits. To make significant profits you will have to make a large number of trades or trade high volumes.

• Positional trading indices - involves buying and holding an index for a longer period of time: it could take from several days to weeks and longer, therefore far less trades are made. This strategy as any other has advantages and disadvantages: each trade carries a greater potential for profit.

  However, holding a position for a long time can also increase the inherent risk. Position traders might take a position in an index before or even after a critical event.

• Trend trading indices - trend traders attempt to profit from short to medium-term market tendencies that influence the index. Traders take only bullish or bearish positions based on general market sentiment. Then they apply stop losses and guaranteed stops to protect profits or reduce losses in the event the trend reverses.
• Technical indices trading - involves chart analysis and decision based on patterns and indicators. Candlestick charts will give the trader the idea where the price is likely going.
  Here are 4 types of indicators
  • Trend Indicators - are helpful to determine whether the market is bearish or bullish, they are even called oscillators, because they swing massively. Some of the trend indicators are: Parabolic SAR, Simple Moving Average, Exponential Moving Average, and Fibonacci Retracement.
  • Momentum Indicators - determine the strength of a trend, giving traders a clear idea if a short-term reversal will occur. When a dwindling momentum manifests, it indicates that the market is growing weak therefore subject to retracement or reversal. But when the momentum is upbeat, the trend bears the same strength and will likely last. There are three momentum indicators: 100 Line Cross, the Momentum Crossover, the Divergence signal.
  • Volatility Indicators - Those traders who want to see how much a price changes over time, volatility indicators are for you. Since volatility is a key player in profit-making, traders need to analyse it. Increased level of volatility indicates a rapid increase in price. But remember while this gives traders more opportunity to place positions, it is not indicative of price movements, only price ranges.
  • Volume indicators - shows the volume of trading in a certain index and its change over time. When the price changes, volume levels can give an indication of how strong the next move may be. Bullish moves on high volume are more likely to be maintained than those on low volume. This class includes On-Balance-Volume, Chaikin Money Flow, Acceleration Bands, Market Facilitation Index and Klinger Volume Oscillator.

Bottom Line

The Bottom Line is first of all you have to have a trading account with a broker you trust, as well as a downloaded trading platform MT4/MT5. Then you have to do your due diligence regarding most traded indices and their characteristics, choosing how to trade indices and the index you want to trade, as well as knowing and using trading indicators to conduct solid technical analysis. With all that in hand and the right trading strategy, you are ready to trade indices.