Equity index trading allows you to take a view on a group of shares, as opposed to an individual stock price. Generally, indices are driven by a macro view of the market and are less how single stock shares are trading. Some of the largest and most popular indices include the Dow Industrial Average, the Nasdaq 100, the DAX, FTSE, and Nikkei. There are indices that reflect the movements of stock prices for nearly all of the developed countries. There are also indices that reflect share prices for emerging countries.
How to start trading indices?
The first step is to find an index that is liquid and that you will follow. It’s important that you understand the domicile of the country the index follows. The developed countries have the most active and developed indices as well as futures markets that follow those indices. The benefit of a futures market is that it tracks the index nearly 24/6. Once you have picked out several indices that you believe you will follow, you may want to track the news that is released that affects the price of that index. You also may want to determine what stocks make up the index that you are following. Some indices reflect the largest companies, while others follow only technology companies.
What types of news alters markets?
Most equity indices are driven by economic data and sentiment. Economic data reflects the growth potential of the earnings of the companies that make up an index. You can follow the economic data for the country of the indices that you are trading by using a financial calendar. A financial or economic calendar shows you the economic data that will be released in the coming month along with any forecasts of each specific release. What is important to remember is that it will take a surprise to alter the future price projection of an equity index. Earnings of a stock that makes up a large component of an index will also drive the future direction of an index. For example, Apple shares help drive the direction of all three major US equity indices.
Sentiment also drives stock prices. You can track market sentiment using a number of tools including technical analysis indicators. A technical analysis indicator describes past price action and can give you a clue into future prices movements.
Developing a trading strategy
Before you risk your capital, it’s important to develop an equity index trading strategy. This includes determining when to enter a trade and where you should exit a trade. You want to try to determine this information before you enter a trade. Your trading strategy should incorporate risk management which should describe how much you are willing to risk on each equity index trade.
Summary
Equity indices are indexes that track broader markets. The most liquid equity indices follow developed markets. You should find an index in a country that you will follow consistently. Before you risk any capital you need to develop a trading strategy that includes sound risk management.
