How to Trade an Index Profitably

How to Trade an Index Profitably
20 votes

trade-indices

An index is a statistical measure tracking the performance of a large group of stocks. For those who wish to trade 30, or 500, stocks all at once, index trading can be an attractive choice. Before you begin trading the indices on the Banc De Binary platform, let’s go through the basics of index trading.

By using the following four steps, anyone can confidently start trading indices with opportunities for sizeable returns.

4 Easy Steps

Step 1: Understand The Basics of Index Trading.

Indices can cover an entire market or certain specific segments of it. Examples of indices are the UK FTSE 100 (based on 100 British stocks), the S&P 500 (based on 500 US stocks from the financial, industrial, transportation and utility sectors), the Dow Jones Industrial Average (based on 30 stocks), and the NASDAQ (based on American and international high-tech stocks). These indices, along with many others, are available on the Banc De Binary trading platform.

Step 2: Understand the Stocks within the Index.

When trading indices with binary options, it is very important to understand how changes in a stock can influence the index value. As we have seen, stocks are components of the overall index so any movements either up or down in the value of the stock will likely change the price of the overall index. Understanding what influences these stock prices can help you to determine the correct price direction of the index you’re trading.

As can be expected, a change in a stock price in an index with fewer components, such as the DAX 30, will have a greater knock-on effect on the overall index value compared to that of a larger index, like the S&P 500.

Step 3: Understand the Context of the Index.

Stock market indices are an important component of the daily financial news outlets, but these news stories also need to be understood in their correct context. For example, if you’re trading the German DAX index, it would be helpful to know as much as possible about the German economy as a whole. The internet has made this information easily accessible to all, and in this day and age, a small investment of time could reap you much knowledge.

There are investment market trends that can be seen broadly in certain sectors of the stock market. The ability to understand these market trends and knowing how to evaluate stock prices is vital to trading indices well.

Step 4: Remember the Lessons of the Dot-Com Bubble.

Remember that not all news will have an impact on the price of the stock and subsequently the index. What is important is how the trading community reacts to the news. This lesson is perfectly exemplified by the dot-com bubble, which occurred between 1997 and 2000. During this time, a wave of investor money poured into any stocks related to the internet. Traders were buying companies simply because they had an “e-” in front of their name, or a “.com” at the end of it.

By March 2010, the index peaked at 5,132 during intraday trading. After a series of business fails, and the discovery of illegal accounting practices, the NASDAQ bubble popped. As traders sold off their tech stocks, panic entered the market and the price plummeted. By November 2000, the price had dropped to 3,027 and the index kept falling for months to follow.

Summary:

An index is only as strong as the stocks which it is comprised of, also known as its components. By understanding the stocks within the index, and the context in which the index is performing, it is easier to predict its next move. Finally, for those willing to do the necessary research, indices can be a profitable trading asset.

Share This