Indices trading enables traders to deal in a group of stocks, diversifying their portfolio, and lowering their risk without owning the underlying assets. Further, stock market indices act as incredible tools that represent the overall performance of an economy and the globe. The smooth price movements in the indices market make it an appealing financial asset.
Dealing in indices seems beneficial, but you don’t know how to get on with it? Firstly, keep educating yourself and learn how indices work. Then, train yourself by practicing your moves.
While you’re at it, run through some popular strategies and analyze its byproduct. We’ve listed down the top strategies for dealing with indices with the help of financial advisors and investment experts.
A renowned trading practice followed by every market is day trading. It is the process of buying and selling in indices throughout the same day. Day traders primarily focus on the short-term fluctuations in a market and ensure to open and close all positions within the market before it closes for that day. A significant benefit is that the trader can save up on overnight costs of holding an asset. Additionally, you don’t have to worry about making a loss while you sleep. Here all your attention should be on making decent earnings from the slightest of price movements.
However, keep in mind that day trading is recommendable for traders who can put in a considerable amount of time for their trades every day. Since it requires a lot of research, it is time-consuming. Making profits in a day trading setting can only happen if the trader consistently observes the market, follows relevant news and takes proactive decisions. Practicing day trading can enable a trader to speculate the short-term market trends and performance eventually and thereby anticipate an index’s price movement.
Influential Announcements By Big Corporates
As indexes comprise stocks of multiple companies, each component firm plays an impactful role in its making and breaking. Primarily the biggest firms affect the status of an index more dynamically since they account for the highest measure. Hence, any significant financial announcements or published reports can cause volatility in the index prices.
For instance, let’s refer to the index (DJIA) Dow Jones Industrial Average, wherein American Express is one of the largest components of the index. Now, if American Express makes an announcement that is beyond the market expectation, the company will see a shift in its stock pricing, which would reflect in the index’s pricing. The change could be both ways; a hike or a fall, depending on the nature of the announcement and the response it gets.
The breakout strategy allows active traders to engage in indices trading and open positions while a trend runs through its initial phase. When practically interpreted, such a strategy can be beneficial as it marks the start of a massive price movement and a volatile market. Further, if a trader plans and systematically manages their trades, the strategy can help lower the risk.
It is known as a breakout when a price fluctuates beyond a set support/ resistance stage and with a raised volume. Are you confused about what a support or resistance level is? Let’s decode that!
When a stock’s pricing depicts the ability to recover after a fall, it’s a support level. Contrarily, when a stock pricing tends to fall after its price hike, it is called the resistance level. With the breakout strategy, traders open a short position when the prices break below support. On the other hand, traders open a long position with their index trade when the prices break above resistance. However, when the prices push past these obstacles, indices become unstable, and prices start to trend towards the direction of the breakout.
Trading with Technical Indicators
Indices trading with technical indicators comprises analysis of charts and decision-making based on related indicators, patterns, and tools. The patterns we are referring to are the candlestick appearances on a chart. These charts and patterns expose how and where the price might move next.
Listed below are four dominant indicators that are known worldwide;
- Trend Indicators
These indicators represent the course that the market would move towards. They are likely to shift between the highs and lows in values in the form of a wave, also known as oscillators. Few renowned trend indicators consist of Simple Moving Average, Fibonacci Retracement, Exponential Moving Average, The Bollinger Bands, Parabolic SAR, and (MACD) Moving Average Convergence Divergence.
- Volatility Indicators
Such indicators display the intensity of price fluctuations within a given duration. As traders, it’s well-established that volatility is a crucial and unavoidable fraction of the market. If there were no volatility, there wouldn’t be any profits. It implies a rise in volatility would result in swiftly moving index pricing, allowing traders more occasions to capitalize and grow. Do not get misled by the volatile markers, though. Since volatility only speaks about the ambit that the prices move within, nothing about the future status.
- Momentum Indicators
Momentum indicators give you an insight into a trend’s strength and whether any anticipated reversals will occur in the short term. Here, an increasing momentum may indicate that the trend is going strong and will continue to do so. Contrarily, a declining momentum condition suggests that the market is becoming exhausted and could be inclining for a reversal or retracement. 100 Line Cross, the Divergence signal, and the Momentum Crossover are three fundamental trading signals that come to life with the momentum indicators.
- Volume Indicators
These indicators depict the indices trading volume for a specific index and its movements over a period. Traders can use this as a powerful tool once the price fluctuates since the volume levels represent the next market movement. Further, bullish market moves are more likely to sustain on a high volume than on low volume. It comprises Chaikin Money Flow, On-Balance-Volume, Acceleration Bands, Klinger Volume Oscillator, and Market Facilitation Index in its category.
Are you still puzzled about the best indices trading strategy for you? Well, your confusion is justified. While these strategies give you a basic overview, you first need to understand your trading methodology, expectations, and goals before finalizing the perfect fit for you. Working with a suitable strategy won’t be too complicated once you’ve determined all of the essential factors and determined your risk appetite.