What Is Indices Trading? A Definitive Guide For You
Index trading is entirely different from commodity trading or Forex trading where traders usually invest in commodities or currency respectively. An index is simply a figure which provides a reflection of the health of an economy or the market, so when you invest in indices, you will be simply investing in funds which reflect the movement of the index. With index trading, you are able to invest in a vast segment of the market or even the whole market. In stock index trading, for instance, you could invest in NASDAQ, FTSE 100, the S&P 500 or the Dow Jones, among many other indices that represent separate broad market properties. When you invest in the Dow, for instance, you will be investing in a tremendously large section of the industry market.
Why Should You Trade Indices Rather Than Shares?
Here are some of the benefits you will accrue from trading indices as opposed to individual shares:
• A greater availability of leverage that trading in shares: The kind of leverage that is possible with index figure contracts aids in creating a profitable environment for trades that possess a low percentage index gain.
• Fewer technical analysis: Investors are usually able to spend most of their time analysing a single chart and then attempting to screen through hundreds of stocks for the ideal company.
• High Liquidity: The indices market is highly liquid, and it aids in creating tighter spreads which then translates into less money being spent on every transaction.
• You do not have to screen the stocks for crucial data: Investors can save a lot of time when they do not have to analyse different financial reports. A trader dealing with indices will eventually spend most of his time examining the bigger picture as well as the entire market sentiment.
How Can You Trade Indices?
An investor can trade indices through an ETF, CFD (contract for difference), option or index future. All the methods of trading have their weaknesses and strengths.
A contract for difference (CFD) is not a standardised tool listed on the exchanges. It is basically a betting instrument offered by a company for an investor to speculate in the market he is interested in. There are commodity CFDs, stock CFDs, as well as other CFD types. The advantage of using CFDs is that they provide one with the ability to trade in micro lot sizes. With CFD, a trader can speculate without risking the amount of money that the index futures would need. However, CFDs have a disadvantage in that the company providing the CFD must make money off the price spreads, which is the difference between the asking price and the best bid.
Index futures are usually traded on Futures Exchange and typically have an expiry date hence their pricing usually includes a forward premium of interest as well as a discounted dividend, both of which could be confusing. Index CFDs are generally easier to understand since they usually trade at the spot price, with a very small commission added and they do not expire.
There is usually nothing special about trading ETFs, but the standard lot is usually 100 shares. If you go below the required regular lot size, your trade could be routed to the odd-lot dealers instead of being directly handled via proper channels.
When To Trade Indices
A majority of professional traders often choose to trade when the market is highly volatile, like when a specific market has just opened or when it is nearing closure. Besides, global news events as well as crucial economic data, like the interest rate announcements or U.S. non-farm payrolls usually trigger volatility above the average.
Why is Timing Important?
Many people would be inclined to think that they could profit from the news if the acted faster than other people. However, that is not the case.
• One important aspect about timing is that the market usually moves on anticipation. “Purchase the rumour and sell the fact.” If you made a purchase on every piece of good news released by the press, you would end up being broke.
• Another critical aspect to note is that the market typically responds to the difference between actual news and what was initially expected. For instance, the unemployment rate could have gone down by 0.2%, and the market falls since it initially expected a 0.4% drop.
• In most cases, action should not always translate into an immediate reaction. With interest rates, in particular, it is important to note that it usually takes more than a single move to witness a reaction in the economy.
Price Action Trading
While economic data, as well as other global news events, usually trigger price movements in the indices trading market, you do not need to analyse them for you to trade markets successfully. The reason is that world news and economic data which result in price movements within the market is eventually mirrored through price action on the market’s price chart. In the long run, an analysis of price action essentially tells you about the people in control of the market. It also gives an indicator of the ones who are losing control, be it sellers or buyers. Once you are in a position to establish this, you can identify reversals in an index and eventually make money.
Technical Trading Signals
Technical trading is referred to the process through which an investor makes trading decisions based on objective, pre-determined, and clear rules. These rules usually apply only to volume, price data, and for the future markets open interest. The technique that is often used in technical trading usually includes chart patterns, moving averages, trendlines, and other indicators that are based on mathematical formulas. While none of these is complex, it requires practice to perfect it.
A technical trader could also be influenced by some fundamentals. “Long-term trend followers ” those who purchase stock when trends are rising are often tracking the increase in the overall value objectively.
Day Trading Versus Swing Trading
If you are an index trader, one of the initial decisions you will have to make it identify the holding period for all your trades. Your specific holding period usually plays a huge role in establishing your ultimate trading style. The two options at your disposal when it comes to holding periods is day indices trading ( entering and leaving the positions in one day) or swing trading (getting into a trading position one day and later exiting a few days or weeks later).
The main difference between day trading and swing trading usually has a lot to do with the management of risks on the trades. With day trading, an investor will be entering and exiting positions within a period of 24 hours and therefore be in a position to go back home flat every day. Day traders often don’t have to worry about overnight positions not unless they decide to hold a position. With swing trading, on the other hand, an investor will often be holding overnight positions and therefore will end up being a subject to overnight risks, including wider spreads on the index positions.
Another difference between day trading and swing trading usually deals with the time needed for each of them. Day trading usually needs intense focus throughout the trading period (or at least for just a few hours). Day traders need to analyse market activities, enter trades as well as manage trades while the market is still open. On the other hand, swing trading usually requires an investor to spend less time during regular market hours to place as well as manage their trades since swing trades could last for several days, therefore no need for continued babysitting. This is an aspect of swing trading which makes it lucrative for investors running full-time jobs which might not accord them sufficient time during the trading period to analyse the markets. Swing trading, however, usually needs extensive work once the market has closed in the form of identifying prospective opportunities and interpreting charts.
Finally, day trades usually have an advantage in that there are zero overnight financing fees, although the commission costs are generally higher because of the frequency of trading.
Why Money Management is Crucial To Success
The difference between successful index traders and losing index traders has very little to do with the trader’s ability to choose winners than one would think. All traders will often experience losers and many of them. This is just a fact of the business. Winners, however, usually embrace the understanding that a huge element of a trade is £randomness” in effect, each trade is to some extent a gamble. Losing trades are usually inevitable, and winners usually consider this inevitability. A majority of successful managers have achieved a winning percentage greater than 50%. It is not necessary to realise that success rate to profit in the long run, though. In fact, it is not even mandatory that you be 50% right.
Successful traders continually manage their mental attitude so as to maintain confidence in the event of uncertainties as well as discipline in the midst of randomness. A tried and tested trading plan is crucial. Many traders often lack the discipline to adhere to a trading plan, and this could have dire consequences.