How to trade stock indices

Why trade stock indices?

Advantages

• Relatively stable instrument

  Since stock indices are weighted averages of a set of several dozen shares, there should not be such price fluctuations in stock indices as in the case of individual share prices. In other words, stock indices are not as volatile as single stocks (with certain exceptions - eg. DAX40).

• Tendency to grow

  The price of most stock indices tends to rise in the long run. This is also the reason why investing in them is one of the first choices of active fund managers or large companies.

• Risk diversification

  By speculating on the development of the share price of one company, you are logically exposed to greater risk than if you decide to speculate on the price of the entire set of shares from a given industry/region. While a company's stock can score a few points in one day (either up or down) and jeopardize you if you don't expect it, the stock index is far more stable.

• It is possible to speculate in both directions

  As already mentioned, stock indices can only be traded through financial derivatives. This includes products such as (CFDs, ETFs, OPCE, Futures, and more). Typical of products such as CFDs is the option to speculate on both price rise and price decline. This gives you the opportunity to potentially earn even if the markets are falling.

• Possibility to use the lever

  For financial derivatives, you can use the so-called financial leverage, i.e. open larger trading positions than you can achieve with your own funds. The maximum financial leverage for brokers operating in the EU is 1:30. This means that you have the opportunity to speculate with up to 30 times the amount you have deposited. Both profits and potential losses will correspond to this.

Disadvantages

• Time limit

  Unlike Forex, stock markets copy standard business hours and are not open 24 hours a day, 5 days a week. This must be taken into account when developing a suitable business strategy. Below you can see a table with a breakdown of the trading hours of the main stock indices.

How to trade stock indices?

Due to the purely statistical nature of stock indices, stock indices cannot be traded in a conventional manner. You can't just come in, buy a certain amount of a stock index, and once its price gets higher, sell it. However, what is possible and what is commonly practiced is speculation on the development of the price of stock indices via financial derivatives.
 

Financial derivatives include:

• Futures

• OPCE

• CFD

• ETF

• Certificates

CFD trading

Probably the most popular way of trading stock indices is through so-called differential contracts (CFDs). These offer all the main advantages of trading in financial derivatives, such as financial leverage and the opportunity to profit from both rising and falling prices, but for example, compared to futures, CFDs are more affordable and also easier to trade.

Warren Buffet stock index trading strategy

There are several strategies for trading stock indices, and they usually differ depending on the style in which you want to trade them. Some prefer trading positions that are closed in a few minutes, others do not want to spend a few hours a day at the computer and may only want to look at markets once a week. The strategy we will show you here would certainly be recommended by Warren Buffet, although he probably never followed the technical analysis. However, it promotes long-term confidence in the US economy and thus in stock markets, and according to Warren Buffet, the safest investment is to invest in a stock index, which includes hundreds of companies, and the risk of a larger decline thus decreases.
 

Technical analysis for long-term traders

Any one of you who has ever heard of technical analysis certainly knows that it is mainly about monitoring the price over time. However, in order to gain a slightly deeper insight into the market and find the levels where we want to trade, when and how to enter, we need to monitor the markets for several years and get a "feel" for them. However, if you do not have the time and want to be part of a long-term growth trend of stock indices, we offer strategy, which require less attention and can offer you a few trading opportunities per year but nonetheless a very interesting ones.
 

Monitoring of 100 day and 200 day moving average

The moving average is one of the most basic tools of every trader and its use in the financial markets dates back to the very birth of the stock exchange. This is the average of prices for a certain period, which is expressed in the graph by a curve. It smoothes the price from more significant fluctuations, which is why it is called the moving average. Most traders only follow it to confirm the trend, but only a few know that it is a basic tool for determining the price turn of most Wall Street investors. Specifically, we are talking about a moving average for a period of 100 and 200 days. Most traders only need a 100-day average, but 200 will offer many potential opportunities as well. It is necessary to have a period selected in the graph when one candle is drawn on the daily graph. Then, in the trading platform tools, find the moving average and select period 100, and then repeat the same procedure with period 200.

^{Chart: S&P 500 stock index chart and 100-day (blue) and 200-day (red) moving average curves (Source: PurpleTrading cTrader)}

Two curves (preferably color-coded ones) are drawn in the graph. The whole strategy is to engage in the long-term growth of stock indices, which has been tested in history. Specifically, we will try to enter if the price gets above the moving average and then returns to it. When testing the moving average curve, we enter a long position (purchase). In the chart, you can see the several opportunities rounded out that the S&P 500 stock index offered in 2020 and 2019.

The only time the strategy did not work was during the outbreak of the pandemic and the subsequent sell-off in the financial markets. You can look further into history and see that it is really a method that has a relatively high success rate.

The strategy can also be applied to other stock indices. Some traders are also using this strategy as a tool for their further analysis. The fact is, however, that the strategy can only be used as it is and there is no need to oversize it unnecessarily.

Most renowned indices

DAX40 - 40 largest "stocks" from the Frankfurt Stock Exchange

The DAX Index (Deutscher Aktienindex) is a German stock market index consisting of 40 major German companies. All these companies are traded on the Frankfurt Stock Exchange through the Xetra trading system. The DAX index is made up of the 40 largest German companies in terms of market capitalization, similar to the US Dow Jones index. It is therefore only a small selection of companies and does not necessarily represent the health of the German economy as a whole.


 

Dow Jones Industrial Average

Dating back to 1896, the Dow Jones is the oldest index, listing the 30 largest and most traded companies in the United States. Giants such as Coca-Cola, Nike, IBM, Apple, Microsoft, and others all contribute to the final value of this index with their market capitalization.


 

Index SP500 (Standard and Poor's 500)

A stock index composed of 500 large companies traded on stock exchanges in the United States of America. The SP500 is one of the four major US stock indices; the other three are the Dow Jones 30, the Nasdaq 100, and the Russell 1000.


 

NASDAQ

All stocks of companies traded on the US Nasdaq Stock Market are monitored by this index. There are more than 3,300 companies, most of which are of a technological focus, but they do not necessarily come from the USA. The NASDAQ index is one of the most popular stock indices among traders.

Why Purple

We offer all the above-mentioned indices (and many others) for trading in the form of CFD contracts. But that's not the only reason why trading at Purple Trading should make sense to you. You can find the rest of them below.

Trading can be risky - but with us, you will not end up in negative numbers

If due to an unfortunate series of events, you deplete your trading account balance and end up in negative numbers, we will reset your account back to zero and pay the negative amount. This technology is called negative balance protection and it secures all our clients.
 

Brisk executions, narrow spreads

Thanks to our robust infrastructure with servers in the Equinix LD4 in London and with a direct connection to our liquidity providers.

 

Regular news from financial markets

Every day we publish an overview of current events in the markets, write articles on the most important events not only from the stock market environment, and once a week we publish a “swing outline” video in which we sum up the previous week on financial markets and try to predict what will happen in the upcoming one.

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