Trade Forex Trading

Introduction to Stock Index Trading

Index trading is gaining popularity among traders and Indices charts are now provided alongside currency charts. We have arranged a tutorial for our traders to learn trading these financial instruments, which will be helpful if they want to start trading these instruments. Similar to forex, these financial instruments are also leveraged products - this is one of the reasons why these financial instruments have attracted & gathered a lot of popularity.

What is a Stock Exchange Market Index?

A stock market index tracks how well a group of stocks are doing from a specific stock exchange market. For example, in the UK, the FTSE 100 index tracks how the top 1 hundred companies on the London Stock Market are performing.

Most popular indexes track the performance of blue chip companies in the various stock exchange markets around the world. The stocks & shares of these blue chip corporations are the most traded in any given exchange market because the blue chip corporations represent the best corporations in a given country - therefore this means these indices are the best tools for analyzing the performance of any particular stock exchange market.

Stock Indices Trading

As global investors and traders, we are interested in stock market indexes because we can trade them to make money. Stock indexes are now offered by brokers as trading options along with currencies. Similar to currencies, brokers also provide leverage for trading these indexes.

Stock indices have various advantages over Forex, these are:

  1. Requires less capital than FX
  2. Movements are based on stock market heads & have better trends
  3. Moves are less volatile and more robust.

Let us illustrate each of the above in details:

1. Requires less capital than FX

Traders buy and sell these financial tools in contracts or lots, much like in forex. But indices need less money per lot than forex. For instance, with 100:1 leverage, forex takes $1000 for one lot. Indices only need $5 to $150 per lot, based on the index. The table lists details for the top 14 popular ones.

  1. Australia ASX200

    Symbol - AUS 200Cash

    1 Point - 0.1

    Pip Value - AUD 0.1

    Margin per Lot - AUD 70

  2. EU EURO STOXX

    Symbol - EU 50Cash

    1 Point - 0.1

    Pip Value - € 0.1

    Margin per Lot - € 40

  3. France CAC40

    Symbol - FRA 40Cash

    1 Point - 0.1

    Pip Size - € 0.1

    Margin per Lot - € 40

  4. Germany DAX30

    Symbol - GER 30Cash

    1 Point - 0.1

    Pip Value - € 0.1

    Margin per Lot - € 85

  5. Hong Kong HangSeng 50

    Symbol - HK 50Cash

    1 Point - 1

    Pip Value - HKD 1

    Margin per Lot - HKD 450

  6. Italy FTSEMIB40

    Symbol - IT 40Cash

    1 Point - 1

    Pip Size - € 1

    Margin per Lot - € 250

  7. Japan Nikkei225

    Symbol - JP 225Cash

    1 Point - 1

    Pip Value - JPY 1

    Margin per Lot - JPY 90

  8. Netherlands AEX 25

    Symbol - NETH 25Cash

    1 Point - 0.1

    Pip Value - € 0.1

    Margin per Lot - € 5

  9. Spain IBEX35

    Symbol - SPAIN 35Cash

    1 Point - 1

    Pip Size - € 1

    Margin per Lot - € 140

  10. Switzerland SMI20

    Symbol - SWI 20Cash

    1 Point - 0.5

    Pip Value - CHF 0.5

    Margin per Lot - CHF 100

  11. UK FTSE100

    Symbol - UK 100Cash

    1 Point - 0.1

    Pip Value - £ 0.1

    Margin per Lot - £70

  12. USA S&5 500

    Symbol - US 100Cash

    1 Point - 0.1

    Pip Value - $ 0.1

    Margin per Lot - $30

  13. USA NASDAQ 100

    Symbol - US 30Cash

    1 Point - 0.5

    Pip Value - $ 0.5

    Margin per Lot - $150

  14. USA DJIA 30

    Symbol - US 500Cash

    1 Point - 0.1

    Pip Size - $ 0.1

    Margin per Lot - $12

From the above table you can see that the required margin per lot/contract is varying from about € 5 up to € 250.

The value per pip varies from $ 0.1 up to € 1 per lot. In the value per 1 pip for 1 lot is $10 dollars but for indices the value per pip is a lot smaller. However, the total pip movement for stock indices is far greater than that of average an Currency Pair. Therefore even though the pip size is smaller the average stock index movement per day is about 500 - 2000 points.

2. Better trends because movements are based on stock market moves

The movements of indexes tend to be more predictable than that of forex currencies. This because historically there is one constant in the stock market - Stock prices always go up over the long term - this means that because these indices track the movement of stocks, then over the long term the market trend of these instruments will keep moving upwards. Of course when there is economic recession the stock market index trend will tend to move lower - but recession only comes once in a blue moon - therefore most of the times as traders we want to focus on trading when there is economic growth all over the world and the stock market indexes are moving up, because people have money to invest and they are investing in stocks, henceforth moving the stock index trends higher.

Because the trends will most of the time be upwards, you want to be more on the buy side than the sell side - because in general individuals keep buying stocks. This is not to say that there can't retracement a bit and retrace a little, it just means that the odds of making money when you buy are better than when you sell, especially if you hold your trades for some time. Even if you are a scalper, it is best to wait and scalp the upward market moves as they are more profitable and in line with the trend. Remember if you trade the pullbacks they will just be short term market moves. These pullbacks come about when traders are taking profits therefore selling some of their stocks - thus causing these short-term retracements.

The other factor that makes the indices keep moving up is that, the stocks being tracked are blue chip companies, the most profitable companies chosen and selected from the most profitable industries & sectors of their respective economy. This means these are the most lucrative stocks & shares in any given stock market exchange - and in general the best, their share price will keep moving up because these companies keep turning a good profit. Therefore even the indexes tracking these top shares will in general keep moving up.

Another thing is that the companies on an index are always being checked. If a company no longer meets the requirements for growth and profit, it is taken off the index and replaced by another company that is doing well. This means the indices will keep going up because they always represent the best companies.

The most effective strategy for indices trading involves a trader waiting strictly for a pullback event, subsequently buying into that dip, allowing the market a few days to ascend, securing the profit, then waiting for the next price pullback to buy again, in a continuous cycle. If you observe the price positioned near a peak following a significant upward surge, always delay purchasing until a pullback materializes. Typically, one or two favorable pullbacks occur weekly where a trader can enter an index position and ride the general market movement for gains. Memorize this strategy - it often dictates whether you achieve profitability or incur losses when engaging with these financial trading instruments.

Moves are less volatile and more robust

This is because indices are based on stocks that are chosen from the best companies in the top areas and businesses in a country, and the indices for trading are picked from the countries with the strongest economies, like the US, Japan, the UK, and countries in the EU.

The indices previously mentioned represent the premier corporations from the most significant economic sectors of the globe's leading economies. Consequently, their movements exhibit greater stability and less volatility, trending predominantly in an upward direction.

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