To begin with, indices are a way to measure the performance of a specific group of assets, like stocks, including their prices. Famous indices are basically baskets of individual stocks usually ranked by institutions including the Deutsche Börse, FTSE Group or Standard & Poors. For instance, FTSE 100 measures the 100 major companies on the London Stock Exchange.
Also, as part of indices trading strategy, indices allow traders to become exposed to a whole economy at once with just one open position. Generally, indices trading is preferred over individual stock trading as there isn’t any company that can directly affect the index’s price overall.
Indices trading & CFDs
Not all traders know that they can trade indices via CFDs. In fact, this is the most popular way to trade indices. Traders can speculate on the price movement of indices without actually owning the asset. They can do this with CFDs on the best indices trading platform, the MT4. Buying, selling and analysing stock index CFDs is very similar to trading traditional stocks.
Moreover, the indices market is considered highly liquid and has more trading hours compared to other markets, so traders are exposed to potential opportunities for a longer period of time. Trading CFDs on indices is considered a balanced way to trade major global financial markets because you do not need to analyse how an individual stock of a company performs.
Indices trading strategy
As already mentioned, trading indices reduce the exposure that you would otherwise face if you traded stocks individually, as there are clear movements in prices and the opportunity to diversify your trading portfolio. The cost is also reduced. The fact that major stock indices around the globe are interconnected with different economies, either globally or country-specific, enables traders to make use of index trading strategies to enhance their position in the market.
When it comes to trading indices, there is no absolute rule to determine the best strategy. Traders should start with the one that better suits their trading goals and style. Position strategy and breakout strategy are some of the most popular strategies for trading indices. The key here is to understand them and choose the one that works for your trading plan.
Trading indices: A deeper understanding
There are two main things to bear in mind when you start trading indices online. Firstly, you should consider the required amount for opening a trading account. Some of the best brokers for indices will require you to deposit a minimum amount to register with them whereas some others won’t. In any case, you need to make sure that you have sufficient funds in your account to place a trade. Secondly, consider the amount of margin provided as the majority of platforms will ask you for quite a high initial margin, which you should generally maintain. Margin requirements vary based on the area and account type. Also, different brokers offer different leverage and various account types.
Regarding the best time to trade indices, there are specific periods of time within the trading week that the volume of the market and assets’ prices are out of control. This happens because the market takes all news or events into account. For example, between 9:30-10:30 am EST is one of the most appropriate hours for season traders as they get access to major market moves in a relatively short period of time.
Keep in mind that based on the specific exchange, different indices are traded at different times. If you are new to the market, avoid trading during hours of high market volatility. The answer to the best time to trade indices is simply when the markets are open during the various time zones. Unlike the forex market, they are not open 24 hours a day so you will need to find the perfect time to open a position in the indices market, based on your individual preferences.
Factors affecting an index’s price
- Prices of commodities
- Economic news
- Financial results of a company
- Announcements of a company
- Alterations in an index’s composition
Why trade indices
- Ability to go long or short. When trading index CFDs, traders are able to go long or short. The former refers to buying a market because you expect the price to increase. The latter refers to selling a market because you expect the price to decrease. The outcome will depend on how accurate your prediction was and the size of the market movement in total.
- Trading with leverage. Since CFDs are leveraged products, this means that you will only need to deposit a small amount of money, also referred to as margin, to open a position. This way your market exposure is much bigger. However, always remember that when trading with leverage, both profits and losses are calculated based on the total size of the position and not just the initial amount you used to open the position.
- Hedging opportunity. If investors have a collection of various shares, they might sell an index to hedge against losses in their trading portfolio. If the market has a downward movement and the value of their shares decreases, the short index position will increase in value, counterbalancing what was lost from the stocks. In the opposite case, if the stocks’ value increases, the short index position would compensate for the profits made. There’s another scenario in which you might have a short position on various individual stocks featuring on an index. With a long position, you can hedge against the risk of any increase in the price. If the index rises, your position will generate revenue, offsetting part of the losses on your short positions.
