Indices Trade Strategy

The Best method of Index is to use a system & combine it with the retracement entry strategy. This is the best method to ensure that your risk: reward is high enough thus improving your chance of making more profits from trading Index charts.

Pull Back - Retracement

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

In the above illustration the chart is of Germany DAX30 Index - The 1 Hour chart time frame is used to look for a price pullback. In this chart the long term trend is upward - in addition the main fundamental strategy that's being used for Germany DAX30 and all European Stock Index at the time of writing is QE - we shall explain this on our market sentiment for indices course. For now let's continue with the explanation of our strategy.

For the above set-up, you as a stock indices trader can see there was a pull back on this stock index, but now the moving averages have turned & are starting to move upward - this is our entry signal where as a trader you open a buy trade on this stock index. You also can add another indicator such as the RSI to confirm this signal.

From the above illustration - we waited for a price pull back, this pull-back quickly reversed & the uptrend continued, the moving average turned up & RSI moved to above 50 confirming our buy signal, a buy trade was then opened at the level of 11,810 and this upward trend continued up to the index level 12,050. All these time our system shows the upwards market trend was gaining momentum as the two indicators, the MAs cross-over system kept moving up & the RSI indicators remained above 50 mark - RSI levels above 50 means that prices are closing higher than they opened.

Take-Profit

At the same time on this set-up, since our trade positions are in profit, we want to tp order while we're still ahead. Note that our trading system is showing the market signal is still a buy but because we want to book our profit while ahead we shall close this trade. This trade has made movement of 2,400 points in our favor earning a profit of $236 __dollars per lot. We had opened 2 lots making a total profit of about $560, we had also added 2 more lots at 11,980 & for these we made some additional 700 points profit.

Remember for Indices 1 pip per lot is equal to 0.1 dollars & not 10 dollars per pip like in Forex. However, the market daily market moves for indices is about 500 to 2000 points while forex daily pip movement is average of 50 to 100 points - therefore in indices even though the market moves are about 2000 points, the profit per point is only 0.1 dollars - therefore when trading indices if you make a profit of 2000 point the total profit in dollars is only $200 dollars like the example illustration put on display above.

The other point is that the average lot for indices is lower and lesser than the standard fx lot, while the forex lot requires a margin of $1,000 dollars, a standard contract for the above trade require only € 85(about $90 dollars), this means the standard lot in Indices is 10 times smaller than that one in FX - Therefore the lot used in the above trade is the equivalent of a mini lot.

The screen shot below shows out index chart after we have closed our trade & taken our profits.

System Specifications

Indicators

1. 5 and 7 LWMA - MA Cross over Method
2. RSI - 50 Centerline Cross over Method

Trading Rules

1. Wait For Pullback
2. After Pull-back, look for entry signal - Both MAs MAs Moving Averages should be moving upward & RSI should be above 50 center mark.

Remember the long term trend for this stock index is upward, therefore we only open buy trade positions (The Trend is Your Friend).

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