Indices Trading Strategy
Stock indices track the performance of the best stocks in a particular stock market. Because the stocks that are being tracked are the top traded stocks from the best companies chosen from the best sectors and industries in a particular economy, it means that the value of these stocks is likely to keep going up over time and therefore the stock indices that track these shares will also keep going 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 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 pullback in the stock indices level.
- Wait for 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 pullback look like – The price pullback is shown below.
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 trading strategy is profitable.
Example Trades Using This Strategy
The example below shows a few trades that were opened using this strategy.
This example shows that even though the trend is generally upwards, there is always a price pullback that traders can use to enter a buy position. The best thing about waiting for pullback is that you reduce your drawdown to a minimum and thus chances of you trading strategy becoming more profitable are increased.
In the above example the first trade opened after the pullback 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 drawdown and they now have to wait for price to go back up to get back to break even.
Where to Take Profit
On the example below – there are a few open orders that are already in profit. These orders are shown 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 starts to retrace, no – you take profit when the market is headed way up as shown below.
Open Trades - Time to Take Profit While the market is still heading upwards
Trades Closed – Take Profit executed and profits booked
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 retracements outside the market, enter when the pullback momentum has faded and the market upward trend is resuming.
Also as a 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 strategy to use to make money – you might catch one trade, but 9 times out of 10 you will be on the wrong side of the trade.
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. Therefore, 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 stock 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 trader it is 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 as shown in the example above.
Strategy 2: Diversify the Indices 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 can check another one to see if it has a better trade setup and then trade the top 3 or top 4 or top 5 indices that have the best trade setup for the day.