Indices trading can be rewarding and offer traders plenty of opportunities. Like any asset you decide to trade, a good understanding of the factors which can impact Indices price movements is very important.
Recognising trends, events and data releases that could prompt price movements will come with greater experience as you become accustomed to some of the more regular events which may move Indices markets.
To help you get started trading Indices more confidently, we’ve put together a few tips and strategies to consider when drawing up your trading plan.
Understanding market correlations
Because Indices are essentially baskets of individual Stocks there are a number of important market correlations between Indices prices and other related markets.
The most obvious assets that can impact Indices price movement is the Shares market. Big changes to Share prices in a particular sector can have an effect on Indices prices, particularly if the affected sector makes up a disproportionately large share of the index you have decided to trade.
The Forex markets are another correlated asset that can impact Indices price movement. Many Indices are particularly sensitive to shifts in the value of major currencies and there is often a strong relationship between the relative strength of a country’s domestic Stock index and the performance of its currency.
This is where research and analysis are key, always make sure you understand the component parts of your chosen index and how events in correlated markets can impact these.
Using market data to your advantage
When trading Indices, economic data can be a huge driver of performance and it is crucial to your trading success that you are able to identify and anticipate the market events which may precipitate price movements.
For this using an economic calendar can be incredibly beneficial to your trading plan as it will allow you to look ahead over the medium and longer term to data releases which could impact your position.
For example, if you trade the Wall Street index, major data releases from the US like Non-farm Payroll data, unemployment figures, Federal Reserve rate decisions, inflation data and consumer confidence reports may all impact market sentiment.
Position trading and trading with the trend
Because many of the major Indices face similar challenges, events and market reactions, position trading, where a trader looks to open a position and hold, can be an effective strategy.
Trading with the trend by using longer term charts in conjunction with technical tools such as indicators, drawing tools and pattern analysis may help you in developing a position trading strategy that suits your goals.
A common sense approach to risk management
As with any financial market or investment, there is an inherent risk in trading Indices. While the volatility in index markets may be somewhat less than in other, more unpredictable markets, like Shares or Cryptocurrencies, a solid risk management strategy is key to your success.
You can make use of the powerful tools in our TraderPro platform like stop losses, trailing stops and limit orders to help manage your risk appetite and lock in profits.