Introduction to Stock Index Trading

Index trading is gaining popularity among traders and Indices charts are now provided alongside currency charts. To train our traders that want to start trading these financial instruments we have prepared a tutorial for studying how to trade these financial instruments. Just like forex, these financial instruments are also leveraged products - this is one of the explanations why these instruments have gained a lot of popularity.

What is a Stock Market Index?

A stock market index tracks the performance of a group of stocks selected from a particular stock exchange market - for example in the UK, the FTSE 100 index tracks the performance of the top 1 hundred corporations listed on the London Stock Exchange Market.

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

Stock Indices Trading

As international investors/traders & traders we are interested in the stock market indices as trading instrument which can be traded and transacted for profit. Stock indices are now some of the instruments provided by brokers alongside currencies. Just like in currencies leverage is also provided by brokers for trading these instruments.

Stock indices have various advantages over Forex, these are:

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

Let us explain each of the above in details:

1. Requires less capital than FX

These financial instruments are traded in lots just like Forex, but the average capital requirement per lot is less for indices when compared to forex. For example in forex with leverage 100:1 a forex trader requires $1000 dollars to open one lot but for indices, traders require between $5 and $150 to open 1 lot - depending on the stock index that is being traded. The table below shows the specifications for trading the most popular/liked ones - 14 in number.

Australia ASX200
Symbol - AUS 200Cash
1 Point - 0.1
Pip Value - AUD 0.1
Margin per Lot - AUD 70
EU EURO STOXX
Symbol - EU 50Cash
1 Point - 0.1
Pip Value - € 0.1
Margin per Lot - € 40
France CAC40
Symbol - FRA 40Cash
1 Point - 0.1
Pip Size - € 0.1
Margin per Lot - € 40
Germany DAX30
Symbol - GER 30Cash
1 Point - 0.1
Pip Value - € 0.1
Margin per Lot - € 85
Hong Kong HangSeng 50
Symbol - HK 50Cash
1 Point - 1
Pip Value - HKD 1
Margin per Lot - HKD 450
Italy FTSEMIB40
Symbol - IT 40Cash
1 Point - 1
Pip Size - € 1
Margin per Lot - € 250
Japan Nikkei225
Symbol - JP 225Cash
1 Point - 1
Pip Value - JPY 1
Margin per Lot - JPY 90
Netherlands AEX 25
Symbol - NETH 25Cash
1 Point - 0.1
Pip Value - € 0.1
Margin per Lot - € 5
Spain IBEX35
Symbol - SPAIN 35Cash
1 Point - 1
Pip Size - € 1
Margin per Lot - € 140
Switzerland SMI20
Symbol - SWI 20Cash
1 Point - 0.5
Pip Value - CHF 0.5
Margin per Lot - CHF 100
UK FTSE100
Symbol - UK 100Cash
1 Point - 0.1
Pip Value - £ 0.1
Margin per Lot - £70
USA S&5 500
Symbol - US 100Cash
1 Point - 0.1
Pip Value - $ 0.1
Margin per Lot - $30
USA NASDAQ 100
Symbol - US 30Cash
1 Point - 0.5
Pip Value - $ 0.5
Margin per Lot - $150
USA DJIA 30
Symbol - US 500Cash
1 Point - 0.1
Pip Size - $ 0.1
Margin per Lot - $12

From the above table you as a trader can see that the required margin per lot 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 indices tend to be more predictable than that of 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, as a trader you want to be more on the buy side than the sell side - because in general people 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 in any particular 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 indices tracking these top stocks will in general keep moving up.

Another thing also is that companies listed on an index are constantly getting reviewed, if a company stops meeting the growth and profitability requirements it is removed from the index and another profitable company replaces it, henceforth meaning these indices will keep moving up as at any one time they represent the best companies.

The best strategy for trading the indices is for a trader to wait until when there's a pullback, then buy into that dip wait out for the market to move up a few days, take profit, wait for another price pullback, buy and keep repeating this strategy. If you find the price somewhere at the top after an extended move upwards always wait out for a pull back before buying, there's always one or two good pullbacks every week where a trader can buy into an index and ride the market trend for some profit. Please remember this strategy - it'll be the difference that determines if you make money or not when trading these financial trading instruments.

Moves are less volatile and more robust

This point is based on the fact that indices are based on stocks which are picked from the best performing companies from the very best sectors and industries in an economy - and the indices provided for trading are chosen and selected from the countries that make up the leading economies - US, Japan, UK and EU Countries.

The above indices therefore represent the best companies, from the best sectors of their economy, selected from the top leading economies in the world. Therefore their movements are more robust and less volatile - mostly upward trends.

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