Indices Trade Strategy

Indices track the performance of the best stocks in a particular stock market. Because the stocks that are being tracked by this stock market index are the top traded and most liquid stocks selected from the best companies that are picked from the best sectors and industries of an economy, it generally means that the value of these stocks/shares is likely to keep going and moving up over time and thence the stock indices that track and monito these shares will also keep going and moving up.

In the stock market there is one consensus among all traders and that is stock prices always go up over time. Historically, the market has proven this theory over and over again. Our trading strategy will be based on this theory.

Our stocks indices trading strategy is to only open buy trades when trading the indices. The trades will be opened when there is a pull back in the stock index level.

Strategy

Wait for the price pull back
Open a buy position

The Pull Back Setup is Shown Below - Retracement

As a trader even before opening a position, you want to wait for a pull back, but how does a pull back look like - The price retracement is illustrated and shown below.

The Pull Back Setup - Retracement - Stock Indices Trade Strategy

This is the point at which as a trader you open a buy trade. Using this setup gives you the best risk : reward ratio that ensures your strategy is profitable.

Example Trades Using This Trading Strategy

The exemplification laid-out below shows a few trade transactions that were opened using this strategy.

This example shows that even though the stock index trend is in general upwards, there is always a price retracement that forex traders can use to enter a buy trade. The best thing about waiting for pull-back is that you as a trader reduce your drawdown to a minimum and thus chances of you strategy becoming more profitable are increased.

Stock Indices Take-Profit Setup - Take Profit Strategy - Stock Indices Trade Strategy

In the above illustration the first trade opened after the pull back was opened at 4325 level, the second trade was opened at 4350 level. The index value then went up to 4381 level where it is now. A trader that waited for the pull back to buy this index is already in profit as compared to another that bought near the top and are now in draw-down and they now have to wait out for the price to get back to the break even.

Where to Take Profit

On the example below - there are a few open orders that are already in profit. These orders are illustrated below. Most traders would want to keep their trades open and scheme more profits from the market and they might be right - the market may still have more room to go up - but also it is very important for a trader to know when to take profit and you don't take profit once the market begins to retrace, no - you take profit when the market is headed way up such as shown below.

Open Trades - Time to Take-Profit While the market is still heading upwards

Stock Index Trade Strategy - When To Close Open Trades - How Do You Trade a Retracement in Stock Index?

Trades Closed - Take-Profit executed and profits booked

Example Showing the Levels Where Indices Traders Should Take Profit - Stock Index Trade Strategy

As a trader you want to follow the above strategy when trading stock indices, as you reduce the drawdown and you spend less time to make profits because you do not have to wait out for the retracements with open trades, but you wait for the retracements outside the market, enter when the pull back momentum has faded and the market upwards trend is resuming.

Also as a indices trader, never trade the pullbacks, the pullbacks are not in the direction of the trend, the pullbacks are counter trend, and counter trend is the worst trade strategy to use to make money - you might catch one trade, but 9 times out of 10 you'll be on the wrong side of the trade position.

It is best to wait out the retracements and open buy trades after these pullbacks. Remember stock indices keep moving up because these indices track the best shares from the world leading economies. Hence, because people in these top world economies have money to invest and they keep buying the stocks - with the most preferred stocks being these top stock tracked by these indices. This fact that the stocks tracked by these indices are the most sought after stock and most traded and most profitable, meaning that their value is likely to keep going up means that the indices that track these stocks are also likely to keep going up and up and maintain this upward trend.

To increase your odds of making a profit as a indices trader it's best to trade in the direction of the trend and this is the upward trend direction. At the same time always wait for a pull back before opening a trade and close your trades when the index level has moved a good number of points in your favor such as shown in the illustration laid-out above.

Strategy 2: Diversify the Index in Your Portfolio

A good second strategy to combine with the one above is to diversify your portfolio and look for these setups among the 14 most popular stock indices, this way if a particular index does not have a good trade setup, you as a trader can check another one to see if it has a better trade setup & then trade the top 3 or top 4 or top 5 indices that have the best trade setup for the day.

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