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What is Index Trading?
An index simply stated is a barometer for the stocks or shares consisted within it. Let's briefly describe a few popular world traded indices, I say briefly as we are only interested in knowing if index trading in what ever context i.e. futures, cfds, options, spread betting etc, has the potential to profit and is not going to be any different using my strategy.
The Indices described below have a random chart attached that follows the Index’s description, it is interesting to see how my chart setup and strategy compares, and most important of all is it suitable for Index Trading?
S&P500 The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component’s price change is proportional to the issue’s total market value, which is the share price times the number of shares outstanding. These are summed for all 500 stocks and divided by a predetermined base value. The base value for the S&P 500 Index is adjusted to reflect changes in capitalisation resulting from mergers, acquisitions, stock rights, substitutions, etc.
The above S&P500 chart does not behave any different using my chart setup for the purpose of index trading. The EMA200, MA20 and the MA8 are used to determine the trend which I can not emphasise enough that for an “up trend” indication the moving averages must be exactly in the above order that is MA8 on top, MA20 in the middle and EMA200 at the bottom. The trend in the chart above is established immediately after the 3 moving averages cross over. The parabolic SAR indicator is also strongly indicating an up trend. If you hesitated to enter a “long” trade after the trend had formed, then you will notice that the market offers you a second chance just above the blue ball (added marker). The RSI at this point remains in the bullish part of the indicator green ball (added marker) and the Stochastic is stretched to its near maximum low unable to bring the RSI down into bearish territory with it, only to rebound back. This type of formation of the RSI and Stochastic in a trend is a "divergence" of its own and a very powerful one too. Take note that immediately after the Stochastic bounces back the SAR indicates a “long” trade entry point - Index Trading can get no simpler than that!
The Dow Jones Industrial Average comprises of stocks from 30 of the largest public companies in the US traded on the New York Stock Exchange - also known as DJIA, DOW or the DOW Jones and Wall Street. This Index was created by Charles Dow in 1896 to weigh the performance of the Industrial sector of the US stock market
The Dow Index my favourite!... In the chart above on the extreme left the Bollinger band has been spiked, if you notice it is a very narrow band and an explosive move is expected shortly. Though the SAR indicator is indicating a "short" trade, the trend was not formed until later, but then I would not trade this – why because the candles are too small and their tails are dragging the bottom of the Bollinger band…I would stand aside and wait. If however you had placed a “short” trade when SAR first indicated you would be profitable – but the excitement begins when the large green bullish candle spiked the top Bollinger band and the EMA200, followed by a “dark cloud cover” (candlestick bearish pattern). What’s happening here is that we have an overbought situation, price has found resistance at the EMA200 level and the bears are now fighting back and are driving the price down. So where do we make our money…can you spot the down trend moving average formation on the right of the chart? This is where to place your short trade after the formation and at the first close of a bearish candle below the MA8. Let's look at some videos and a slightly more advanced method of trading the FTSE100 and the DAX30 From Index Trading to Stock Market Trading
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