Indices trading allows traders to work with a diverse portfolio of stocks via a particular index to bring down their investment risks. There are many index trading strategies which allow traders to recognize the right market entry and exit levels. Visit multibank group
This article will explore important indices trading strategies in detail.
What are indices trading?
Indices trading refers to trading of a group of securities which form the index. A complete index can be traded based on the combined average performance of all securities in question. Index value is determined by taking into account the cost of all securities together which is then divided by the total number of securities.
Index trading strategies
Day trading strategies
Day trading refers to the method of selling and purchasing indexes within the same trading day. The central idea that runs is to close the running positions before the trading day ends. It helps cut down risks as well as costs that you may have to pay to your broker for keeping positions open overnight. Day trading strategies may spawn fast but still bring good returns because of the miniscule shifts in market prices.
Day trading strategies work well for traders who are able to trace the markets regularly. To be able to do this, you need to be well versed with all the geopolitical and economic news while also being on top of the different movements in the financial market. It would help you predict price trends which would let you earn from the small price shifts.
Breakout trading strategy
Breakout trading strategy is when you recognize the space within which the index price keeps trading over the course of time. Right when the index price shifts beyond this space, a breakout takes place which signals traders to either enter or come out of the market.
In this strategy, index traders typically move to their positions the moment a certain trend begins in the market:
- If the index price breaks over the resistance level, it hints at a continued uptrend in the market and indicates traders to open long/buy positions
- If the index price breaks under the support level, it hints at a continued downtrend in the market and indicates traders to open short/sell positions.
Bollinger entry strategy
Bollinger entry strategy establishes oversold market areas and helps traders with the right entry levels in the market. It includes three types of bands –
- The middle band, which refers to the simple moving average of the index price
- The upper band that stands for the high market prices
- The lower band that stands for the low market prices
In this strategy, traders search for price breakouts over the upper band since it is a sign of a continued uptrend. Therefore, traders opt for long trades the moment index prices are above the upper band in the indices’ price chart.
Trend trading strategy
Trend trading strategy is where traders enter or exit a trade in an already determined continuous trend. When the index trades in a certain direction, traders believe that the trend will keep moving in the same direction even in the long run so they make long or short trade decisions accordingly.
- If the index is trading in the upward direction, traders would go into a long or buy position hoping for the uptrend to continue
- If the index trades in the downward direction, traders tend to go for a short or sell position hoping for the downward trend to continue
Position trading strategy
Position trading strategy is where one holds onto an index position for a considerable period of time such as a week, month, or perhaps an entire year. It does not take into short-term price fluctuations and also helps traders with a clearer direction about the index price’s direction. In this strategy, the goal of traders is to get good returns from key price moves in the long term and to assess monthly price charts before placing entry or exit orders.
Trading a long position with the Position trading strategy:
- If a trader opens a long position in index trading and the index prices keep going up over a few months, traders should take it as a signal of continued uptrend
- If a trader opens a long position in index trading and the index prices keep going down over a few months, traders should take it as a signal of continued downward trend
Trading a short position with the Position trading strategy:
- If a trader opens a short position in index trading and the index prices keep going up over a few months or years, traders should take it as a signal of continued uptrend
- If a trader opens a short position in index trading and the index prices keep going down over a few months or years, traders should take it as a signal of continued downward trend.
Scalping trading strategy
Scalping trading strategy means working with a stringent exit plan in the index market and earning profits from small price movements. In such a short-term trading strategy, traders put many orders in place in a day and also come out of the market within the same trading day to earn from small movements.
- If the index market goes up temporarily upwards during the day, the traders would be signaled to enter the market and exit prior to a downtrend.
- If the index market goes up temporarily upwards during the day, the traders would be signaled to enter the market and exit the market to be safe from downtrend risks
End of day trading strategy
End of day trading strategy is when one trades indices to the points when the markets are about to close. The end of day traders lay emphasis on entering or exiting a market in the final two hours of a trading day as it clearly indicates the index price’s direction. In this strategy, traders have the agenda of placing long or short orders when the markets are volatile to make the most of fluctuating prices. Know more Mejores Brokers de Forex Plataformas de Trading de Derivados Financiero – Grupo Multibanco
- If the index prices move along with an uptrend in the concluding hours of a trading day, traders are signaled to put long or buy order hoping that the uptrend would continue the following day.
- If the index prices move along a downtrend in the concluding hours of a trading day, traders are signaled to put a short or sell order hoping that the downtrend would continue the following day.