Indices Trading Strategies

0
32
Indices Trading

The majority of traders wishes to treat indices not much more different than they would any other asset class. They do not like to ponder the factors that make this asset class unique. If a trader has a better handle on features of indices, as well as attributes of indices trading, there would be every possibility of our hypothetical trader coming up with meaningful and memorable indices trading strategies

However, it would pay even more to consider reasons why the stock market has historically shown greater resilience as opposed to FX market. Stock markets – and therefore indices – have been engines of growth and vehicles of stability. Crashes and their immediate aftermaths have been abrupt, sharp and short. Each longer recovery period has aided the long term development of the Economy. 

A history of generous returns

Taking up a particular index to illustrate our points – the S&P 500, over a 20 year period. Right off the bat, we see that annually the percentage return is positive in the main, all in all, totalling up to a 6.3% gains per year on an average. Dividends are discounted here, albeit their status as a secondary gains source for stock markets. Gains average frequency is conspicuous at 61.25%. The max returns and min return rows exemplify the types of moves predominant during both bullish and bearish markets. They also make the point that, more often than not, bearish moves carry more weight than bullish moves. While there have been a minimum of four sell-offs above 11% in that 20 year period, we can discern just one conspicuous double-digit gaining month for said index. 

Past 2 decades: monthly averages 

Jan Feb Mar Apr May June
% Return -0.7% 0.0% 2.1% 1.8% 0.0% -0.5%
Gain Frequency 50% 55% 65% 75% 60% 55%
Max Return 5.0%

2013

7.0%

1996

9.7%

2000

9.4%

2009

5.3%

2009

5.4%

1999

Min Return -8.6%

2009

-11.0%

2009

-6.4%

2001

-6.1%

2002

-8.2%

2010

-8.6%

2008

 

July Aug Sep Oct Nov Dec
% Return 0.4% -1.0% -0.8% 2.2% 1.4% 1.4%
Gain Frequency 50% 55% 50% 70% 75% 75%
Max Return 7.4%

2009

6.1%

2000

8.8%

2010

10.8%

2011

7.5%

2001

6.5%

2010

Min Return -7.9%

2002

-14.6%

1996

-11.0%

2002

-16.8%

2008

-8.0%

2000

-6.0%

2002

 

When we relativise those insights with that of the Euro, the FX realm is shown to us in a very different light. If the average return over an 18year period falls short of the 6.3% seen in the leading index, the offending 1.6%average return finds an appropriate company with a diminished gains frequency. After all, an average of close to 51.9% chance the euro does gain any random month still falls short of the corresponding value of 61.25% witnessed in the S&P500. While stock markets are endowed with inherent trends, the same ate conspicuously absent in FX markets. A possible explanation could be that there are two different types of forces at simultaneous work in the FX case. The GX currency pairs always give us data moving in two different directions. 

Past 18 months: monthly averages

Jan Feb Mar Apr May June
% Return -1.0% -0.1% 0.2% 1.0% -0.6% 0.6%
Gain Frequency 39% 56% 56% 61% 39% 61%
Max Return 2.9%

2013

2.3%

2014

4.6%

2016

4.6%

2011

7.0%

2009

6.2%

2002

Min Return -8.4%

2009

-3.8%

2013

-5.1%

2001

-4.6%

2000

-7.7%

2010

-2.4%

2003

 

July Aug Sep Oct Nov Dec
% Return 0.1% -0.2% 0.5% -0.5% 0.0% 1.5%
Gain Frequency 44% 50% 50% 50% 56% 61%
Max Return 6.7%

2010

4.2%

2001

7.5%

2010

3.5%

2001

3.8%

2004

10.1%

2006

Min Return -2.8%

2012

-5.9%

2008

-6.9%

2011

-9.8%

2008

-6.9%

2010

-4.6%

2009

 

When the investor is looking for an asset to buy and hold, the wise investor would fo for indices as the trading instrument of choice. A hyperactive trading strategy holds out two implications – uptrends are comparatively more reliable, stable, and, dare we say, long term. On the other hand, bearish moves tend to be briefer, albeit more theatrical. We cannot gainsay that the perceived profitability of the concentrated weak periods will find many adherents, even the uptrend cannot reward the angsty trader with consistent outcomes. Instead of calling tops against the odds, it would actually be more useful to deploy the bullish nature inherent in indices to trade with the said trend. 

Bullish trading strategies for indices 

It would be intuitive to posit that, since stocks tend to rocket more often they tend to plummet, a bullish trading strategy for indices is justified. Your account will grow bigger over time since reinventing dividends will bring over a compounding effect. When the stock goes ex-dividend to balance share price drop, you will get a dividend adjustment on a spread betting account. 

Nevertheless, a leveraged futures contract, an exchanged-traded fund, or a non-leveraged stock portfolio would trend a long hold more effectively, and underscoring bullish trend comes courtesy dividends, and active leveraged traders are much enamoured of the same for that reason. 

Be that as it may, if a trader were to consider a trend-following index strategy, they’d be better off looking for higher highs and higher lows supporting bullish set-ups. Taking their cue from that bullish confirmation signal, traders can ride various vehicles to wind up in the trend. 

consolidation/retracement breakout 

As a rule is more common to see small to mid-sized retracements, with the implication that you cannot expect uptrends to see significant retracements. A trader may therefore buy into new highs, a trader may purchase om the breakout. A stop could well be placed below so that a shallow retracement/consolidation would be made use of. Per the Dow Jones chart, the 22,216 prior low placing a stop below, slate September points announce a bullish buy signal at 22,429. 

Deeper retracement entry strategy 

Diminishing their stop loss size to elevate their risk to reward profile. Fibonacci retracements may give traders the opportunity to enter trades for relatively free. Look for pullbacks to give buying opportunities. Markets prefer to move in a straight line. When we mark some deep retracements, we know that the consolidation or volatility validate such moves. 

From the back of a consolidation period within an uptrend come the two 76.4% retracements. per the strategy above you could buy on the breakout thru 23,625. There the first swing high on the way down, You could wait for the break. Since the battle between bulls and bears is consistently perpetual, such a move does give deep retracements. Now we have two successful trades. you can purchase at the 76.4% Fibonacci retracement, placing a stop below the prior swing low. We have a subsequent example of 76.4% entry that comes during a period of important volatility, come December. The general trend of the higher loss and high, instead of giving us a buying opportunity at the 76.4% retracement. 

Bolinger entry 

When a return to the lower threshold of the indicator provides a buying opportunity, give another possible tool to be used for trailers.

If the price respects the band itself., you can close below it when breaking below it, you can have better confidence of a bullish resumption. We must also concentrate on the manner in which you can tie in both Fibonacci entries with a consolidation entry. Many buying opportunities could be had thru the repeated respect of the lower Bollinger band, it is sensible that await a closed candle to mitigate a potential break, closing below the band. such a sign can only be akin to the bearish phase. 

Marrying appropriate indices trading strategies to your trading plan 

You need to be sure about your own trading style, in order to have a meaningful trading strategy for indices.

There are any number of strategies you might be willing to opt for. 

  • Scalping, 
  • Day trading, 
  • Swing trading, 
  • Long term trading. 

Scalping 

 this technique goes in for the accumulation of profits – or rather points – garnered in the course of the trading day. The scalper looks to make just the number of trades that will add up to a great profitable total at EOD. scalpers work with the shortest time horizon, holding positions for minutes, or even seconds, with the plain objective of scooping up just enough trades a day. 

Day trading 

Traders working day trading have short term trading aims, not holding positions once the EOD is well and truly done. 

Swing trading 

 Swing traders hold positions for days, weeks, or even months. These traders try to extract s much as possible out of price swings, working medium to long term. 

Long term trading 

Taking a steady profit is the aim of the long term traders, and they are prepared to hold on to their position for an inordinate length of time. 

Scalpers go into a feeding frenzy at times of volatility, and economic stability connotates low volatility. We can reasonably accept the conclusion that given that there’s more of a frequency of volatility in FX markets, scalpers get more grub in the latter, their true blue Grub Street.  

The coupling 

You can subsequently include any number of these strategies into your trading strategy – position trading, passive index tracking, hedging. 

Position trading 

 The trader keeps on holding on to a certain position once having taken it, and it’s even better when he’s aiming long term. 

Indices have steady, burgeoning growth in times of stability, therefore position trading suits your indices trading strategy. 

Passive index-tracking 

 tracker funds and ETFs invite passive investment, and this has been a trend going back two decades. 

By purchasing underlying constituent stocks or their derivatives, tracker funds or ETFs track famed performing indices. 

Passive index tracking is low cost and a worry-free way to go browsing the indices, sans fees that always come attached to fund managers. And it could still be beneficial to your indices trading strategy – if you know your onions. 

Hedging 

When you short the most relevant index and go long on a certain well performing share, you are hedging. This affords protection against market risk. 

Conclusion 

Indices trading strategies are particularly suited to you if you are thinking long term trading. Not being research-intensive, there’s a lot to be said for the profitability of indices trading strategies. Diversification attends upon you if you follow the indices most relevant to your ultimate trading goals – not a bad thing at all.  

LEAVE A REPLY

Please enter your comment!
Please enter your name here