How to Trade Indices: A Guide for Novice Traders
How to Trade Indices: A Guide for Novice Traders Staff

Indices measure how a group of shares perform on a stock exchange market.  In the US, the commonly followed indices are NASDAQ composite, S&P 500, and Dow Jones industrial average.  In the UK, FTSE100 is the most followed index.  Trading without reference to the indices is like walking on a busy highway while blindfolded.  Indices helps a trader look at the entire economy at a glance and increase the chance of predicting correctly the general direction the prices will be moving.

Indices track the largest companies on the stock exchange.  So they give a trader insight into the entire economy at a glance.  Also, an index measures the performance of different companies and gives insight in to the entire economy.  The stock market index thus reflects the performance of top companies on the stock exchange.  It indicates the overall economic performance of companies in the group.

Note that the stock market indices are calculated based on market capitalization and performance.  Some are based on the share prices of a company.  So indices trading could be the way to go since changes in the company's fortune affect its position and the index.

How To Trade Indices

To trade indices, a trader needs to create a live account and choose an index that suits their trading account.  Selecting the index depends on the capital available and the individual appetite for risk.  Also, the trader's trading style is key to trading indices.  A trader may take long-term and short-term positions on a particular index.  For instance, the S&P 500 has steady returns over time, so it is suitable for traders with a long-term outlook.  Here are things to do to trade index.

Learn About The Market

You will need to choose whether to go short or long.  A trader will go long if they anticipate that the index they want to trade will be increasing in the coming days and may go shot when they speculate that the prices will be decreasing.

A trader goes long if the economy's outlook looks good based on a company's performance.  Thus, if the index increases in value, they realize a profit.  But going short could be an option if the outlook is not good.

Use Stop Limits

These are important tools that help a trader to manage risks.  It is all about putting a stop order in positions, so it automatically closes a position if the prices rise or fall below favorable levels.

Opening and Monitoring A Trade

Once you are ready, go to your favorite platform and select to buy if you anticipate the prices will rise and sell if you think they will be falling.  Also, decide whether to trade futures or cash indices and enter an appropriate position size and click ok.

Index Trading

It is the buying or selling of the stock market index.  An index is the average performance of a group of stocks, so a trader who buys or sells an index will not be buying the underlying stock but a group of stocks.  So if the prices of shares of companies in the group go up, the index value increases and a trader makes a gain.  However, if the prices fall, the value drops, resulting in a loss.

Why A Trader Should Trade Index

Since trading index entails buying or selling shares of a group of companies, it is easier for a trader to predict the direction in which share prices are likely to move by looking at individual companies.  So trading index allows the trader to protect themselves against losses.  For instance, if a trader goes long on a particular index and the market enters a downturn, the shares of the companies may start losing value.  Therefore, the short position on the index starts increasing in value, and offsets the stock's losses.  But if the value of the stocks increases, the short index position offsets the profits the trader made.

On the contrary, a trader that took a short position in the stocks featured in an index can hedge themselves against the risk of increases in prices by taking a long position.  If the index rises, the trader makes a profit, reducing the losses from the short position taken.

Why Choose Naga When Trading Indices

Although you can trade indices on many platforms, choosing a leading social investment platform such as Naga would be a great option.  Opening an account with them takes minutes, and you have more than 950 instruments to choose from.  Naga trades stock indices of major world currencies and experiences high liquidity and trading volumes.  In addition, the platform allows the real-time execution of trades.  It features a mobile interface that will enable you to trade on the go.

Final Thoughts

Trading indices allows you to leverage on activities of a group of companies.  It gives you a chance to have an overview or outlook of the economy in an instant.  This makes it easier to predict the general direction in which prices will be moving and place trades.

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