A Useful Guide on Indices Trading Strategy

Indices are used to measure how a specific group of assets, like stocks, and their prices perform. Indices are baskets of stocks that meet specific criteria. The FTSE Group for instance, tracks the 100 biggest public companies on the London Stock Exchange (LSE) based on market capitalisation.

With indices trading strategy, traders get access to an entire economy with just a single trade. That’s why many traders prefer trading indices rather than individual stocks, as the index’s overall price is not impacted by any company.

Trading CFDs on indices

Trading indices via CFDs is quite popular nowadays. This is made available through various online brokerages. What traders actually do is speculate on the direction of indices’ prices without owning the actual asset.

This way of trading global financial markets is balanced since traders are not required to analyse the performance of a stock individually. The MT4 trading platform is considered the best indices trading platform for trading CFDs on indices.

Advantages of trading indices

Firstly, with indices trading there is less exposure to risk compared to trading individual stocks as price movements are clearer. Also, there is always the opportunity to diversify your trading portfolio. Moreover, there are less costs as well. Traders are able to build their indices trading strategy to boost their trading skills within the market as stock indices are closely related to different economies around the world.

As far as the strategy itself is concerned, there is no definite answer as to which one is the best. What’s important is that traders choose the one that fits their trading requirements and needs as well as the one that they truly understand and know how it works.

Some facts about indices

Keep in mind that the best brokers for indices might require you to deposit a certain amount before registering with them. So, make sure you have enough capital available. Also, some may ask you for a high margin. Margin requirements will depend on the trader’s area and account type. There are also various options for leverage.

When the market is affected by news or events around the world, then the trading volume and the prices of assets reach high levels. Economic news, commodities prices, financial outcomes or announcements of a company and changes in how an index is composed are some of the factors that affect the prices of indices. Between 9:30-10:30 am EST is considered the best time for seasoned traders to trade indices as there are big market moves within a short time period.

However, not all indices are traded during the same hours. In fact, beginner traders avoid trading during volatile hours. Since the market is not open 24 hours a day, like forex, traders will need to find the most appropriate time to trade indices based on their preferences.

Reasons to trade indices

Go long or short

Traders are able to go long which means that traders buy a market based on the prediction that prices will rise, or go short, which refers to selling a market because traders think prices will fall.

Leverage

Traders get to trade with leverage which means that they only need to deposit the margin amount. This way they trade with a bigger amount compared to what they have initially deposited, hence exposure is bigger. However, trading with leverage has risks as well.

Hedging

Traders have the ability to sell an index so as to hedge against losses. For example, if the value of shares falls, the short index position will rise in value, balancing out any losses and vice versa.

DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication