While currencies are the most frequently traded of all the assets, many traders also get involved with trading indices as they can offer the potential for attractive rewards. For this reason alone, they are an ideal addition to your diversification strategy. Here’s how to get started…
Adding Indices To Your Trading Portfolio
Trading the indices can be a rewarding experience for traders as many HYCM traders have found, since either partly or as a whole, they tend to have higher returns than the stocks they represent. In order to learn how to trade indices, it’s a good idea to get a firm understanding from the offset as to how they work and how changes in a particular stock has a bearing on the overall index value.
An index can best be described as a gauge of the changes in a pool of stocks representing a segment of the market indicating the direction in which the market is heading and what the likely trend might be. Investing in an index is a much easier and cheaper option than investing in every stock within the index itself.
As stocks are components of the overall index, any change in the value of the stock in question will affect the price of the index. So, it follows that a movement in a stock price in an index with fewer components such as the DAX30 will have a greater impact on the overall value of the index compared with that of a larger index such as the S&P500. Once you start following the markets, you will learn to identify market trends which can be observed in certain sectors of the stock market. Understanding these market trends and knowing how to evaluate stock prices is the key to getting the best result from your trading activities.
To start trading the indices, you should be aware that the factors that influence prices can help in determining the right price direction when placing trades. Not all news will ultimately impact on the index. What is important is how the trading community reacts to the news which to a large extent is based on perceived impact. It is also worth knowing that following just one index is not likely to provide a true picture of the current market status. All the major indices should be taken into account prior to making any trading decisions.
There are several benefits associated with trading indices, mainly in that they allow you to gain exposure to all the stocks included in the index without the necessity to purchase each one separately. This can prove advantageous in terms of cost and diversifying your portfolio. Spreading the risk of trading an entire market is perceived as preferable since the largest stock markets tend to feature general trends reflecting the overall market sentiment that can be traded.
Indices generally provide a simpler route into trading unfamiliar stock markets. While it might not be easy to select an individual stock to trade in an unknown stock market, the actual index itself is likely to be more familiar and less volatile.
Trading indices has also proved an attractive option for many technical traders because of the way in which they perform in respect to technical levels and patterns. Indices are consistently known to respect major technical levels, round numbers and chart patterns, providing good trading opportunities.
Overall, choosing to trade the indices is an ideal way to spread your risks and a means to greater stability for an investor. If you want to get involved, you can start by opening an online account with HYCM broker to gain access to their trading platform where you will find a comprehensive list of tradable assets including indices. It is also advisable to practice trading on a demo account in the first instance in order to fully understand the techniques involved in trading this exciting asset.