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How To Trade Indices? Index Trading Guide for 2020
Lynne
2020-02-27 2412

While there are different types of asset classes to trade at Mitrade, including Forex, Commodities, and Cryptocurrencies, Stock Indexes are one of the most popular and for good reason.


You can trade Stock Indexes like the UK100, SP500, AUS200, and the US30 with a leveraged CFD trading account.


This article will introduce you to the exciting world of index trading and explain how to trade stock index like a pro. Don’t worry, you’ll learn the basics of indices and some of the strategies employed by successful CFD index traders.


Without further ado, let’s start our journey.



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What Is Index Trading? How Does It Work?


Stock indexes have been around since the original Dow Jones Index was first created in 1885.


Charles Dow, working at the Wall Street Journal, wanted a way to quickly aggregate the performance of the economy at that time.


The result was the Dow Jones Industrial Average, which was a gauge measuring the performance of the North American leading 30 industrial stocks, and therefore the broad economy as well.


Back in Charles Dow's day, there was no way to actually trade the index though.


If an investor wanted to do that, it would have meant buying every stock in equal weightings. Not very practical at all.


It wasn't until the first financial derivatives in the 1970s and the advent of stock index futures that trading an index became possible.


Stock index futures are mainly an instrument for large financial institutions and only the most affluent of traders.


These days financial innovation has moved on fast, and now smaller retail traders too can speculate on the leading stock indexes throughout the world.


There are ETFs, Index options, Spread Betting and we also have Stock Index CFDs, which are one of the primary products here at Mitrade.


Index CFDs are a simple but effective way for a trader to profit from the direction of the world's stock indexes.


Legions of traders from all over the world day in day out place trades on these markets.


Some choose to take quick intraday trading opportunities, others prefer short-term swing trading methods, while others prefer long-time frames lasting weeks or even months.


With the leverage that Index CFDs allow, it opens up many opportunities for those who wish to partake in this very exciting and potentially lucrative business.


Index CFDs personally have a very special place in my heart.


They were the first financial instrument I ever traded and the first where I made serious money.


For anybody wanting to learn the ropes of trading, Stock Index CFDs are a great entry-level product, something I will discuss more in-depth later on.

What Are The Most Popular Indices In The World?


Index trading takes place on many different indexes throughout the world. But the four most popular with retail CFD traders are the US30, SP500, Aus200 and the UK100.


If you are not yet familiar with these then let me briefly discuss each one of them in turn. You can also find these indices at Mitrade trading platform.


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★  US30


As mentioned above the Dow Jones Industrial Average was the world's first stock market. 

And today it remains the most well-known of the world's indexes.

It was forever made famous in the market crash of 1929 that went on to usher in the Great Depression.


The Dow has recovered from those days, with the index now pushing 30,000. 


None of the original Dow components (the companies that make up the Dow) remains in the index.

The last one to be dropped was General Electric.


Still, today's traders will be familiar with the names that make up its components.


Leading stocks such as Facebook, Alphabet (Google), Microsoft and Amazon are heavily weighted in the DJIA.


The US30 is a very popular index for CFD traders, arguably the most popular of them all. 




SP 500


While the Dow remains the most famous index, it is not the biggest. That title goes to the SP500.

This is a basket of the top 500 companies in the US by market cap.


Again, the Facebooks, Googles, Microsoft are all there.


But their weightings in the index are much lower, and these days the SP500 is considered a better benchmark for the United States economy and the whole world.




AUS200


The All Ordinaries 200 or AUS 200 with CFD traders down under is the leading stock index in Australia.

It is very popular because it is a leading benchmark of not just Australia but Asia generally.


Many of its components are affected by what happens in China.


If China is booming, then the AUS200 rides high.


If China is faltering, then so is the AUS200.


The index has a large weighting of mining stocks. The world's largest miner BHP Billiton is listed there. As is another behemoth Rio Tinto. These mean during commodity booms the index tends to outperform other world markets.


However, the index also has a diverse range of industries including financials, consumer goods, real estate and tech, which still make the index a decent proxy for the Australian economy in general.




UK100


Which brings me next to the FTSE100, known as the UK100 among CFD traders.


Like the AUS200 it too contains both BHP Billiton and Rio Tinto, but these companies have a smaller weighting in the UK index.


The biggest companies in the UK100 comprise of HSBC, BP, Royal Dutch Shell and Vodafone. These are the stocks that have the most pronounced effect on any moves in the UK flagship index.


Note the large presence of oil companies, while the AUS200 is primarily a mining benchmark, the UK100 is often considered an oil benchmark.


The UK is also in a unique position.


With its geographical location straddled between Asia on one side and the United States on the other, it offers some supreme trading opportunities for those who know how to play the time zones.


Why Trade Indices Rather Than Stocks?


Traditional stocks are great, if you've got a fundamental opinion on a specific stock or sector, and plan to hold that stock for the long haul. 


Stocks to suit investors who don't want to spend too much time monitoring trading positions and are more focused on stock picking strategies than say technical analysis or the global macro outlook. 


For those who want to take a more active approach to managing their own money, Stock Index CFDs offer several advantages over individual stocks.


✔️Stock Index CFDs use leverage 


That means for a relatively small amount of money deposited with your broker, you can control a much larger amount in notional contract value.


Traditional stock investors are not offered leverage and instead purchase their full trading position outright. 


If you're a small retail trader, it's more profitable to use contracts for difference. 

It's amazing how a bit of leverage can boost your returns.


✔️Short selling


Trading on the bear side is very easy with Index CFD trading, unlike stock investing which is a cumbersome process.


If you don't know what short selling is, it's the ability to profit in a down-trending market - after all, stock markets don't rise all the time!


Some of the most and quickest money ever made in the markets was from the short-side, and this is one of the biggest reasons why traditional stock traders are moving over to use them.


✔️Risks are lower than holding individual stocks


Because a stock index reflects a basket of stocks, then even if you're wrong with a trading decision you're not nearly as exposed as you would have been with an individual stock.


✔️Index CFDs have extended trading hours


Unlike traditional stocks, Index CFDs trade in extended hours, sometimes even 24 hours a day, Monday to Friday.  As they do here at Mitrade.


When markets close, large gaps can appear in market prices as they reopen. This is one of the things traders fear most.


To a large extent these can be avoided when index trading via contracts for difference. Unfortunately the same cannot be said when stock trading, unless you have special access to out of hours trading facilities.


Overall both stock index CFDs and stocks have unique characteristics. For some none- leverage through stocks works best, for others the ability to control large amounts of capital for a small deposit works wonders.


While individual stock trading is not going away in a hurry, Stock Index CFDs are proving amazingly popular among retail traders.

How To Trade Indices With CFDs?


CFDs are one of the easiest and most popular ways to trade indices. They are traded on margin, meaning that for a small refundable deposit you can actually control a much larger trading position.


This is known as trading with leverage. You can also profit from both rising (going long) and falling (going short) markets .


Let’s look at a trading example on the AUS200.


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Step 1: You’re using an MACD crossover system on a 15 minute chart


Step 2: The indicator is about to flip from red to green which is a bullish sign


Step 3: You place a market order at the buy price of 7077


Step 4: You add a protective stop loss 10 points below the current price


Step 5: You wait patiently for the price of the index to rise


Step 6: Plan to take profits 30 points higher for a 3 times risk reward ratio


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The Two Main Approaches To Index Trading


There are primarily two styles of market analysis.


Fundamental analysis is the study of markets through factors such as central bank monetary policy, fiscal policy and geopolitics. Individual stock markets are also analysed through PE ratios, projected earnings etc.


Technical analysis is the study of past price charts. The theory is that all the fundamental factors are already considered in the price. Technical analysis is a wide-ranging discipline, but the study of trendlines, support resistance, and momentum of price are major considerations.


Which is best?


As a short-term index trader, I would say technical analysis. That's what I know best. However, fundamental factors do play an important role, especially in the long-term. Catching a fundamentally driven rally is every trader's wish.


Often traders settle on a combination of both to add to the probability of trade success, but it is really up to you which.

Advantages Of Index Trading With CFDs


There are many advantages of trading stock index CFDs.


● high leverage

● less risk than individual stocks

● long and short trading

● tight spreads

● natural bias to the upside

● less intraday volatility than other asset classes


It is the last two that I wish to discuss in more depth. 


These two are rarely discussed make all the difference to your trading results. 


Yes, you can indeed go short stock indices, and make money very fast if you can get your market timing correct.


The crash of 2008, the Taper Tantrum of 2010, and the Flash Crash of 2013 are all testament to that.

But besides the often brief but sharp sell-offs, stock indexes do actually spend most of the time in uptrends.


Why is this?


Well, as in the case of the Dow as talked about previously, poor performing companies are dropped over time from an index.


And in turn, replaced by star performers. This gives the index a natural drift upwards.


Also, there is simply too much money out there among hedge funds, pension funds, investment funds, and mutual funds and all of them need to spend it somewhere!


This is good for you because, let me you, from all my experience trading CFDs, it's much easier to make money on the long side than the short side. 


Few will tell you this. But it will dramatically improve your trading results!


Stock markets just go up easy than they go down, and at the end of the day, the job of a trader is to take the line of least resistance – which is usually up.


When you trade from the short side, not only do you have players who want to buy at support levels, you also have players who want to close their short positions.


This leads to something known as a short squeeze.


These happen frequently and can test the nerves of short-side traders, leading to irrational decisions. 

It's my opinion, trading from the long side can be much more profitable when it comes to Stock Index CFDs.


Also, intraday volatility tends to be much less in indices than say in Forex or commodities. 


Again, this can lead to irrational and emotional decisions if you are currently lack trading experience.

Which all go to make Stock Index CFDs the best entry-level instrument for traders.

A Simplified Platform For Index Trading - Mitrade

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Mitrade is an award-winning broker regulated in Australia by the ASIC. 


And are rapidly establishing ourselves as a leading player in the retail Forex and Contracts for Difference industry.


Index Stock CFDs are a major part of their service that they offer to clients, and besides the 'big four indexes', they provide competitive spreads on other indexes such as the Hong Kong 50, the Nasdaq100, and the Eurostoxx 50.


  • the trading platform is simple and intuitive

  • provide around the clock online support(24×5)


We are aware that trading indexes with leverage can seem daunting at first. But our mission is to provide clients with the training and support to make their experience a pleasing one, but much more importantly a profitable one.


Indexes are always going to be a popular way to trade and we are sure our range of indexes is a good fit for you.

What Are The Best Strategies For Using With Stock Indexes?


If you’re wondering how to trade stock indexes there are actually many ways. It's impossible to list them all here.


But I can mention three of the most common ways that traders choose to approach the market.


Day Trading 


This is often the hardest way to start, however, there are some methods easier than others. Opening range breakouts are one such way. 


The highest point the market gets to within the first hour is considered the day’s resistance level. 

You can place any entry order just above this price level, and should the market then move above it, the likelihood is that it will continue for the rest of the day.


Short-term Price Action Trading


A short-term position trader might hold a trade for three or four days. Some very simple pattern trading opportunities repeat regularly throughout all markets. 


These include setups such as inside bars, pin bars, or pivot highs. All these are very suitable for short-term position trading.


Trend Trading


This is often done off weekly charts. Many of the same setups that work on daily charts also work on this timeframe. Weekly trading requires patience, but setups on this timeframe are much more accurate than on the lesser ones. 


With weekly chart trading, there is a better opportunity to incorporate fundamental analysis into the decision-making process.

Conclusion


Index trading in my opinion is the best way for beginners to get started in this business. Yes, other markets might be more exciting, moving faster and stronger, but that is not always want a beginner needs.


The natural bias to the upside in indices cannot be overstated.


And because intraday volatility when Stock Index trading is lower, those who haven't quite yet mastered the psychological aspects of trading can still find early success.


If you’re serious about being a trader trading Stock Index, trying to trade with a demo account. Mitrade provide with $50000 practice funds allowing you to master your strategies before using them in real world trading. 


You’ll find the trading platform simple and intuitive with fast execution. Happy Trading! :)



Trade on Indices in 3 Steps:


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Risk Warning:  Index CFDs are a leveraged product and can result in the loss of your entire capital. 





The content presented above, whether from a third party or not, is considered as general advice only. The information provided here does not consider one or more of the objectives, financial situation and needs of audiences. In addition to the disclaimer below, Mitrade does not represent that the information provided here is accurate, current or complete, and therefore should not be relied upon as such. This information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Mitrade is not a financial advisor and all services are provided on an execution only basis. We advise any readers of this content to seek their own advice. 


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