Indices are an excellent market to trade. Their charts are easier to understand when compared to Forex charts, and they follow trends.
This makes it easier for you to create successful strategies based on trends.
What Are Indices?
According to fintech companies like Capital.com, the first step in learning how to trade indices is knowing what they are. In its simplest form, an index is a way to measure the value of a group of stocks. Imagine that you gather a bunch of companies and calculate the averages of their share prices. The value that you end up with is the index for that group of stocks.
There is some variation in how indices are calculated. For example, each company’s stock value is not weighted the same when the average is calculated. This means that a larger-sized company will have a more significant influence on index value compared to a smaller company.
What Types of Indices Exist?
Several types of indices exist to measure different groups of stocks in the stock market. In some cases, the indices measure the stocks in a country. In other instances, they measure the stocks in a sector, like industry or technology. Some of the most popular indices include the following.
- NASDAQ 100 index measures the top 100 tech companies in the United States.
- The Dow Jones, also referred to as the Dow Jones Industrial Average measures the 30 largest industrial companies in the United States.
- The Nikkei index is an index from Japan. It shows the top 225 companies in the country of Japan.
- The DAX 30 is an index of the leading 30 companies in Germany.
- The FTSE 100 measures the top 100 companies in the United Kingdom.
- The CAC 40 measures the 40 best companies in France.
Why Trade Indices?
One reason is volatility. Indices are highly volatile, especially in the opening minutes of a country’s index. Volatility is a positive thing for traders who are comfortable with it. Volatility means that the markets are going to move in a determined way. There are not many false stops, which get rid of background noise that could cause investors to make wrong moves based on false signals.
Since indices trend so powerfully, they make it easier for investors to strategize. That is why they are so popular and are traded every day by investors.
How to Make Money Trading Indices
You make money trading indices like you would trading the Forex market, stocks, or cryptocurrencies. You open a trade in a direction, and you make money if the price goes in that direction. If the price goes against the direction you chose, you lose money.
Many people will use moving averages as their trading system. When a price is trending, they will wait until they see a pullback to moving averages. They watch to see the price recover from the retreat and make an investment based on the trend direction.
As with all investments, there is risk involved. Thankfully, the trending nature of indices makes them easier for experienced investors to understand, allowing them to create strategies based on trusted trends.