Trading and investing with stock indexes

Trading the world indexes is one of the most popular trading assets nowadays.

We can find them in almost the totality of CFD and Forex brokers, not to mention binary options brokers.

But the most popular indexes trading instruments are futures, with the S&P500 and DAX as the most known contracts.

There are also the trading and investing using ETFs and contracts like the SPY or QQQ, among others.

It is clear that indexes are one of the trading instruments that better represent the global markets and the economy, although sometimes they can stay far from what can be considered the real behaviour of the society and economy.

For example, you can see the case of the Venezuelan stock market which rises 100% during many year, or even thousands like the Zimbabwe one, and even so these countries have or had appalling economies.

Trading indexes, one of the most popular assets in the world of investing.

However, indexes eventually reflect the real state of the economy in most cases, in one way or another.

Investing in them is simply one of the best strategies used to invest in the financial markets.

It is well documented that the great majority of fund managers of the world cannot beat in average the S&P 500, after for instance periods of two decades.

Some people beat the index one decade but normally perform quite worse in the next.

Invest in stock market indexes

Therefore, if you want a long term investment in the best stocks, the simplest strategy consists in buying a fund or ETF representative of one of the major indexes.

Doing that we can keep things simple without the need to do encyclopaedic fundamental analysis.

Here we can say “the simpler the better”.

Although going back to the issue of indexes trading, as I said at the beginning, we have several options. And not only that, but, also we have many styles and strategies to proceed with trading.

Although let us resume them in two:

  • On one hand day trading and all its variations as scalping the futures or one minute binary options.
  • On the other hand, swing, trend trading and all kind of strategy that means holding the stocks for more than some weeks.

Index day trading

In this case we have many options.

At one end the futures and its typical contracts ES or FDAX.

We also have the ETFs and CFDs, but also have the same assets in binary options.

What should we trade here?

It seems that the most professional answer would be trading the futures, then ETFs, followed by CFDs and ending with binary options.

It will also depend on our account size, especially for futures trading.

Those with bigger accounts may try to trade futures.

As for ETFs, they are not the favourite asset for day trading since they lack the typical leverage the other markets have.

However ETFs can be traded in some American brokers that allow for a 4:1 leverage. These assets are more used for long term investing though.

Let us say that index day trading for retail traders is concentrated in futures, CFDs and binary options.

Here the norm is leverage of about 10 to 1 or much higher, as a lot of people do in futures, for instance.

In the case of binary options we are told there is no leverage but nothing further from the truth since in my opinion they are the most leveraged instruments in the World.

Is it easy to win day trading indexes?

It is not easy to win day trading the markets whether it is stocks, forex or indexes.

You try for a few months and later tell me if you want.

Indexes swing and trend trading

There are many strategies we could use to trade indexes for periods longer than a day, like one week, two or ten.

In these cases the probability of winning increases dramatically.

As for the assets available, we should disregard binary options which normally give a mere 70% payout in long-term bets. Ridiculous.

We should use futures, ETFs or CFDs for this matter.

The most important factor here is the SWAP cost.

If those costs are among certain levels we can do swing or trend trading in an effective way, and the most effective way is going long, which is the main trend of those markets in the long run.

We are not interested in the intraday noise here.

We are interested in looking for big moves, with which we will reduce our trading costs, the costs that are so big in day trading, especially in the spread, which is even worse than commissions.

I have already talked about how bad the spread is in certain assets.

In this case it will be interested to use index CFDs if you do not have big accounts since the futures contracts are quite big, sometimes more than 100.000 or 250.000 dollars of nominal size.

Currently the conditions and spreads offered by CFDs indexes are acceptable as to be traded almost as well as if they were futures.

Futures are more efficient, logically, but if you do not have a big account you rather stay away from them.

That is why because you should not use a big leverage for these assets.

What is more, leverage close to 3 or 4 would be fine.

AS we see this is quite different from day trading, where people try to do big leverage, the likes of 100 or 200:1 looking for 3 ticks in the ES many times a day.

Not need to argue too much about the disastrous consequences of trying that often.

Invest in stock indexes

Index trading or investing is one of the most attractive and efficient way of doing trading.

Indexes should be included in any varied trading or investing account, or at least we should keep track of them from time to time.

Seeing the general state of the market may help us to have a better perspective that can be advantageous for our decisions regarding our individual stocks. This is something that even Jesse Livermore talked us about.

Original article publisehd: trading e inversión con índices bursátiles