Strategy for trading on indicesMonday, 26 February 2018 14:49
Strategy for trading on indices is a method, which is applied by Forex currency market traders and which allows profitable trading in stock indices and shares of companies, as well as CFD.
First of all, it should be said that the stock index is a calculated value reflecting the dynamics of the price of the stock market of a certain state or sector of the economy. It follows that it is impossible to trade by the indices themselves, because it is not an asset. Therefore, derivatives were created – calculated index futures.
When trading these documents, the trader must be able to predict the capitalization of the stock market. This is important, since the profit or, accordingly, the loss of the speculator depends on the decrease or increase of this indicator. Strategy for trading on indices allows trading indices with maximum benefit and below we will tell you how to apply it.
Trading for professionals
All market participants know that derivatives of the stock market are very profitable assets. The reason is in high cost of the price step. In this regard, it should be noted that Strategy for trading on indices is not the best option for beginners. At least, it is so because the starting capital in such a risky trade is quite high. Even minimal contracts can funnel the whole account, so this type of work is suitable only for professionals.
Novices can work with the CFD on indices – virtually identical derivatives, but the CFD can be traded with fractional lots. It's cheaper and less risky.
Strategy for trading on indices
Strategy for trading on indices is a quite effective trading method, based on basic patterns of the market. Let’s consider the example with the Euronext100 index – it shows the value of the large European corporations.
So, what to do? At the beginning of the day, build two straight lines: one - through the Low points of the previous trading day, the other - through the High points. These will be the bands of support and resistance. At the breakdown of these levels, make a purchase or sale, respectively. This is the main essence of the strategy for trading on indices.
Open the deal immediately after the breakdown, when the candlestick was fixed above/below the key levels. The order is ordinary, not pending. For technical analysis, use TF = M30.
Take Profit is equal to the ATR indicator for 20 previous trading days / 3. If it is very difficult for you, place a Take Profit without taking into account the ATR. Then, you need to choose a certain Take for each index.
At the same time, do not forget that the Forex market is not a very stable and reliable trading platform in the world, therefore, a false breakdown can happen. However, do not panic ahead of time and do not close the deal hastily. If it is not supported by external or internal factors, soon, the price should return to the previous movement.
Risk management, according to the strategy
Above, we talked about applying the Take Profit, but did not mention a Stop Loss. It is so because the Stop is not set in this strategy - positions are closed manually when the candlestick on the M30 breaks down the support/resistance level.
If this option is not acceptable for you and you still want to set a Stop, evaluate how the strategy works with different levels and what effectiveness it shows at different values. Then, choose the best option. Consider the history of the index you are trading.
Strategy for trading on indices can be simple and profitable if you follow the above strategy and such recommendations:
- An hour before the trading session is closed, do not open new positions;
- Do not make transactions at all during the day if the session is opened with a gap.
The strategy is most applicable in conditions of a strong trend, so it can be combined with other trading methods.
- Previous article: Strategy for trading in the flat market
- Next article: Averaging Strategy – Using the method of position averaging