What indices can add to your trading
- Indices add strings to your investing bow: Indices can help with diversification but can also add either a defensive or an aggressive edge to a portfolio.
- Several ways to trade indices: CFDs are popular with retail traders, but also ETFs for longer-term investing.
- Use technical analysis to help with timing: Technical analysis can help with the timing of entry and exit points for trades and can be the difference between success and failure.
Indices give you broad exposure to equities
By the basic definition, indices are a basket of stocks. Over the years, those baskets have been formalised to now be considered important benchmarks for equity markets.
This has left us with indices such as the S&P 500 Index, the FTSE 100 Index and the Nikkei 225. They are often considered to be the benchmarks for equities in the US, the UK and Japan.
These indices are tracked by millions of traders around the world. Subsequently, the performance is a gauge of the performance of individual countries (and perhaps even economic regions).
If you want exposure to US equities, the S&P 500 Index is a prime index to trade. Indices allow traders the opportunity of being exposed to the equities of a country, without the need to undertake hours or painstaking analysis of individual companies. You can just trade the index.
Indices give you diversification
Trading indices, therefore, add broad exposure to an asset class. However, they also subsequently add diversification. If you are unsure whether to trade pharmaceuticals, financials, or basic resources stocks, trading the index helps to cover it all and diversifies the trading exposure.
Many traders like to focus on forex, gold, or oil. Trading indices add another string to the bow of a portfolio, which also helps in increasing portfolio diversification.
Trading with Indices
The easiest way of trading indices is via a trading platform such as IXOne by INFINOX.
Index CFDs (Contracts For Difference) – provide a simple, quick and easy way to gain instant exposure to indices.
Trading Index CFDs allows you to buy and sell indices, so that you can speculate on both directions of price movement. This flexibility is a key benefit of trading index CFDs.
Also, margin trading enables you to choose the leverage of the position. This means that you can trade indices as a defensive play, or take a more aggressive view for your portfolio.
However, you should be mindful that there are always risks to trading any leveraged products. You can quickly lose your funds on account if you are overleveraged and markets turn against you. Also there are costs involved in trading index CFDs. There will be the expense of overnight swap costs to consider.
Index ETFs – Exchange Traded Funds are more of a longer-term investment product.
Index ETFs are bought and sold on an exchange (similar to shares). The fund invests in the constituents of the index so that it can track the performance. However, for this, the investors are required to pay annual management fees.
Index ETFs can only be traded in one direction (either long only or short only). Furthermore, they are not leveraged products (unless defined as being a 2x or 3x leveraged ETF). The trader cannot choose the amount of leverage.
Technical Analysis - a tool to enhance your timing
Technical analysis can be a vital tool for trading indices successfully.
When using the IXOne platform, adding technical analysis indicators to your charts can help with timing entry and exit points of trades.
Here’s a quick list of a few indicators that are popular with traders looking to time their trades:
- Moving averages
- Momentum indicators - such as the Relative Strength Index (RSI) and Stochastics
S&P 500 Index
This chart displays the technical analysis of the S&P 500 Index.
The key takeaways are:
- The uptrend since October is intact
- The daily RSI has unwound to pick up again around 40 (similar to the December lows)
- The buyers need to pull the market above resistance at 4029/4051 to re-engage the positive outlook.
- Holding on to the near-term support at 3942 is important.
- A break below 3927 would confirm a new corrective outlook.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
All trading carries risk.