How to Trade Indices

Indices: The Trading Process

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Indices: The Trading Process

Indices: The Trading Process

Trading on indices enables traders to speculate on whether an index will rise or fall, without actually buying shares in the underlying assets. In this sense, one can trade an index just as one would trade a stock, currency or commodity.

As with individual equities, in order to make a profit, a trader can decide to ‘sell’ an index at a higher price than its  initial ‘buy’cost, or to ‘buy’ an index back at a lower price than one he/she originally ‘sold’ it for.

Each share in an index contributes towards the calculation of its overall value, with the index rising or falling in value depending on the performance of its collective stocks. So if the FTSE 100 index is ‘up’, more investors are buying than selling, and share prices have increased. However, if more shares are being sold than bought, the index will instead decline.

Trading on Indices Versus Trading on Equities

Trading on Indices Versus Trading on Equities

Trading on Indices Versus Trading on Equities

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While the value of a stock can provide insights into the financial state of a specific company, indices are good representations of the nature of markets and market sectors as a whole. When trading indices it is important for traders to review events that may affect the value of an index, such as geopolitical news, monthly employment reports, and economic reports.

On the other hand, when trading at the level of individual equities, traders would be wise to track company-related news for stories about new product leaks, defects and recalls, as well as similar news from comparable companies, in addition to potential mergers and acquisitions. It is also important for those trading equities to consider reviewing company’s earnings release announcements.


These factors have the potential ability to move an individual company’s stock prices suddenly and dramatically. By contrast, trading an index means that although a trader is still exposed to these risks, they are at a much lower level.

The Volatility of Indices

Volatility_Ahead_optThe Volatility of Indices

The Volatility of Indices

Indices are typically made up of a large number of stocks and the constant movement of share prices makes indices relatively volatile. However, it is uncommon for all the stocks listed on an index to experience major movements in the same direction simultaneously – it is rare for indices to move by more than about two points each day. Nonetheless, there have been instances where this has occurred, for example, during the stock market crashes. Most famous amongst these are the US market crash of 1929 and Black Monday, the US stock market crash of 1987 – in which by the end of one day, Black Monday, the Dow Jones fell by 22.6% in value.

Trading on an Index: An Example

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Trading on an Index: An Example

Trading on an Index: An Example

Here we give a short example of an index trading scenario:

If the FTSE 100 index stands at 7030, ETX Capital may offer a bid price of 7029 and an offer price of 7031, typically written in the format: 7029/7031. Traders can then choose how much they would like to trade per point.

If a trader believes the market will increase in value, they may decide to “buy” for £10 per point at 7031. Subsequently, for each point the FTSE 100 rises, the trader will earn £10. However, since the ‘sell’ level is 7029, the trader initiates the trade £20 down (£10 x 2 points), because if they were to close the trade immediately, this is the loss that would be incurred. If the FTSE rises to 7041/7043 by the day’s close, and the trader decides to close the position, the profit will be £100 (7041-7031 = 10 point increase, and 10 x £10 = £100).

It is important to be aware that the first two points of movement in this trader’s favour would be needed for the trader to break even (if they exited the trade at this stage) – the following points of movement in the trader’s favour would then be pure profit.

However, if the FTSE 100 decreased instead, falling to a level of 7019/7021, if the trader chose to close the position at this level, they would incur a loss of £120 – as the FTSE is being sold at 12 points lower than the price it was bought at (£10 x 12 point decline).

ETX Capital enables you to trade on major financial indices, such as the UK 100 (FTSE 100), Wall Street (Dow Jones), and Germany 30 (DAX). Apply for an account and start trading on one of our platforms today.  Those who would like to practice trading on Indices with a Demo Account can apply for one here.

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