Strategies for Trading Stock Indices – FinSMEs

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When you are looking for a way to diversify your trading portfolio with less risk or fuss, indices could be the solution you’ve been looking for.

Indices trading is where you trade a group of assets or securities within one index. The aim is to take up positions on the entire index with a focus on combined average performance and the value is calculated by adding the prices of each of the securities and dividing the total by the number.

Top 5 stock indices trading strategies

The good news is that there are plenty of strategies out there to help you increase your potential and many can be utilised by new and established traders alike – even if you still find yourself wondering ”what are indices” (you can click here to read more). Here’s an in-depth look at the top five:

1. Scalping trading strategy

This trading strategy is for short-term trades and requires traders to have a well-defined exit plan for positions taken on small price movements. This is typically done across multiple trades throughout the day (and exiting on the same day, also). When using the right tools and indicators, traders will receive a trading signal that will prompt them to either enter as the market moves upwards or to exit during downturns.

2. Breakout trading strategy

When using a breakout trading strategy for indices, you will need to take positions in the market as a trend begins. The aim is to find an index that has been consistently trending within a bracket price and wait until it surpasses its top marker (hence the term ‘breakout’). The trade signal will prompt you to enter or exit the market depending on your needs.

When an index price breaks its resistance level, it may be time to take up long (or buy (positions, as this may be indicating an uptrend in the market. On the opposite end of the spectrum, if the price of an index falls below its support level, short (or sell) positions are advised, as a downtrend is more likely.

3. Swing trading strategy

For those interested in a more engaging trading strategy, swing trading focuses on the smaller price moves within a wider market trend. As financial markets can be volatile, price action can change with little warning, and swing traders take advantage of the opportunities that these changes can present. This means that both positive and negative changes can be utilised and aren’t restricted to day trading when implemented properly (positions can be held to ride the trend and this could be over a number of days).

4. Trend trading strategy

This trading strategy is straightforward in the sense that traders follow and take up positions depending on current market trends. The principle behind it relies on assuming that a trend will continue in its current direction (either up or down), and traders will make either long or short trades relatively.

5. End of day trading strategy

As the name suggests, this strategy is typically undertaken when the market is closing at the end of the day. Traders will often either enter or exit trades in the last two hours, and in volatile markets, to make the most of fluctuating prices and speculate on how trends will perform the following day.

When index prices are experiencing an uptrend at the end of day trading hours, you will be likely to receive a signal to place a long (or buy) position under the assumption that this will continue into the next trading day. If a trend seems to be dropping however, short (or sell) positions will be prompted instead.

Using leverage to trade indices and the risks involved

When you make the decision to trade indices and select the trading strategy that meets your needs, you may want to improve your efforts by using a leveraged ETF. These Exchange Traded Funds allow you to use collateral from a broker to support your own financial input and enter trades at a better price point. They differ from traditional ETFs in the sense that they aim for higher margin ratios and are available on most indexes, such as the UK’s FTSE.

There are risks involved when using leverage, and these mostly relate to the fact that losses are calculated across the whole spread of the position and not just your personal outlay and can quickly add up.

Disclaimer:

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.

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