Have you ever heard of indices trading? An index is composed of a basket of assets that are bundled together to track their performance in a standard way. In addition, it enables you to get exposure from these multiple assets by just opening a position.
So instead of opening a position the traditional way, when you invest in an individual asset, you can do it all at once. One good thing about this is that when one of the assets in an index goes up, the rest will also rise.
As a beginner, you should try investing in indices trading since it’s not as hard and complicated as traditional trading.
Do you need some tips on how to get started? Then you should check the list below!
1. Get to know the underlying assets
The first thing you need to do is to get to know the underlying assets that you’re interested in. If you’ve tried trading before, then you might already know the underlying assets available in the market. It includes sentiments, bonds, stocks, currencies, and commodities.
- Sentiments- show how a group feels about the market. When trading with sentiments, you can either go with what the group thinks or go against them.
- Bonds- work when investors buy a bond from a company or government, and they’re paid using annual interest. So it’s giving a company the capital, and earning using interests.
- Stocks- buying and selling shares from companies. You can earn money from the continuous change in market prices.
- Currencies- also called forex. You can earn a profit from buying one currency and selling another.
- Commodity- as you may know, commodities like sugar, oil, and gold can be traded. You can earn when you trade futures contracts for commodities.
When it comes to indices trading, you can get exposure from all of these underlying assets at the same time. So instead of finding individual assents, you can start by investing in all of them.
2. Know the popular indices
Are you getting more curious about indices trading? Indices can be formed based on the market, price, and weight of the assets. For instance, ASX is composed of the top 200 companies in Australia that show high market capitalisation.
It depends if you’re eyeing nation, worldwide, or company based, but you can easily see the list of the top indices online. Other popular indices are NASDAQ 100, FTSE 100, and S&P 500.
Once an index captured your attention, you should do more research about it before buying and opening a position. Make sure you’re interested in the underlying assets, and you can work on a strategy.
3. Pick the instrument you’ll use
When trading indices, you’ll also need an instrument that will help you gain more exposure. The most common instrument used in indices trading is the contract for differences (CFD). However, there are other instruments you can use such as Cash indices, ETFs, futures, and options.
- Contract for differences (CFD)- is about a contract between the buyer and the seller which indicates that the buyer becomes the partial owner of an underlying asset. It also includes that the buyer can earn profit from the price difference from the closing and opening of a position.
- Cash indices- when indices are traded during the regular hours. It focuses mainly on the movement of a certain market.
- Exchange-traded funds (ETFs)- just like stocks, they’re traded on an exchange. Moreover, it consists of a pool of securities instead of just one.
- Futures and options- usually work in the long run. It’s basically when the buyer and the seller create a contract that the buyer will buy an underlying asset at a certain price on a specific date.
4. Choose your trading strategy
As a beginner, you might not have discovered which strategy suits you best. In that case, before you start indices trading, you should have an overview of the different trading strategies you can use.
Some of the most popular strategies are:
- Day trading- works when you’re trading indices during the day. So when you open a position, make sure to close it before the trading time ends.
- Position trading- best for long-term trading. Once you open a position, you can leave it for a while before closing it. However, this still has some overnight fees.
- Trend trading- when you like following the trend, you can use it as a trading strategy to plan opening and closing positions based on a pre-determined trend.
- Scalping trading- is used when a trader prefers to get results in a matter of minutes. So you can open and close multiple positions on trading days.
- Swing trading- is the most popular in indices trading since traders tend to go long or short based on the swing of the charts.
5. Know how the price moves
Did you know that many factors affect the price movement of indices? There’s the change in the price of commodities, economic & company news, and financial results. So whenever any of these factors move, it affects the price of indices.
So once you dive into the world of indices trading, you should always be updated on the changes happening.
Now that you have some ideas on how to trade indices, then you should gradually start. Don’t forget to let us know what you think about indices trading by leaving a comment below!
ABOUT THE AUTHOR: Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.
