Day trading involves opening and closing positions in a short timeframe, usually a single day. It avoids the risk and fees associated with holding a position overnight. Indices are a bundle of companies that usually share common characteristics like size or operating sector and can be used as a benchmark.
Indices day trading involves buying and selling indices quickly. It's popular with traders as it lets people speculate on specific sectors or a nation's economic performance. Let's dive deeper.
Basics to Trading Indices
Before opening and closing positions, people learning how to day trade indices must familiarise themselves with the basics. The indices market has many moving parts, so developing a solid foundation is critical to understanding the market and performing favourably.
What Are Indices?
So, what are indices? They're financial instruments designed to measure the performance of a collection of stocks or assets usually tied to a particular sector or sharing key characteristics like nationality or size. Some prominent examples include the US's S&P 500 and the UK's FTSE 100.
Indices (otherwise called an index) are valuable tools for determining performance relative to the overall market or a country's economic growth. It's typical for an index to be weighted based on price or market cap, meaning more valuable companies will account for a larger share of the index.
There are several types of indices, including:
- Benchmark indices are designed to track the performance of a specific market segment. For example, the S&P 500 tracks the 500 largest US-listed companies.
- Bond indices are bundles of bonds (debt agreements). They're stable and usually consist of a specific type of bond, like government or municipal bonds. An example is the TR US 10-Year Government Benchmark.
- Sectoral indices track the performance of companies in a particular sector, like technology or medicine. The Dow Jones US Index, the US Health Care Index, and the US Food Producers Index are popular sectoral indices for day trading.
- Commodity indices measure the price of everyday commodities like gas, grain, or metals. Commonly traded examples include the Bloomberg Commodity Index and the US 12 Month Natural Gas Fund LP.
What Is Trading Indices?
Indices trading is the act of buying and selling indices (bundles of stocks or assets) with the goal of benefiting from price changes. Learning how to trade indices can be challenging and take time. There are many factors to consider, like which index to buy, what affects its price, and the market's health.
In contrast to stock trading, indices offer much greater diversification and enable people to speculate on specific sectors, like healthcare, or a country's economic performance. Often, people use leverage to multiply their position sizes when day trading indices, although doing so carries additional risk.
Why Trade Indices?
People start day trading indices for many reasons. The asset class enables people to speculate on domestic and international markets, specific sectors, and global economies, making it appealing to a wide variety of traders.
There are many benefits to trading indices. While indices can be volatile, they're much less so than individual stocks as they're inherently diversified due to being comprised of many companies. As such, indices are popular with traders, prioritising stability and predictability over large, sudden movements.
How Does Indices Trading Work?
Indices day trading is relatively straightforward. A trader takes a long (buy) or short (sell) position and closes the trade to secure a profit or loss. However, traders must consider fees, the market's health, and upcoming events. How people trade an index can vary, but CFDs are common.
Contracts for Difference (CFDs) are a standard vehicle for trading indices. They are financial agreements between buyers and sellers to purchase an asset for a specific price, allowing people to trade indices without acquiring the underlying assets.
How To Day Trade Indices
While the concept of day trading indices is straightforward, putting it into practice is more involved. Users will need to register and verify an account with a trusted broker like ActivTrades, deposit funds, analyse markets to find a potential opportunity, then open a position, manage, and eventually close it.
Later in this article, we'll go into more depth regarding how to day trade indices.
When Is the Indices Market Open?
People can trade indices almost around the clock if they're willing to venture into international markets. The trading hours for indices vary based on the stock exchange they're listed on and the broker used to place trades. Some platforms offer after-hours trading, while others do not.
UK and European indices like the FTSE 100, DAX 40, and CAC 40 can be traded between 8:00 AM and 4:30 PM GMT (although extended hours run to 8:00 PM). US indices can be traded in pre-market from 4:00 AM to 9:30 AM (ET), in regular hours from 9:30 AM to 4:00 PM, and after-hours till 8:00 PM.
What Affects the Price of Indices?
Indices can span multiple sectors and countries, so the factors that dictate their value vary substantially. Influential factors shared between many indices include inflation, job data, interest rates, risk appetite, market stability, current trends, and investor sentiment.
However, some factors only affect specific sectors. For example, regulations surrounding fracking, green energy initiatives, and finding new deposits can impact gas/oil/fuel indices. Likewise, metal indices are impacted by the cost of extraction/processing, demand for the resources, and new technologies.
Best Indices for Day Trading
While learning the basics of the market is crucial for any trader, determining the best indices for day trading is an individual process. Each market suits various trading styles, reacts to different stimuli, and experiences unique volatility, so it's advisable to read up about the best day trading indices.
S&P 500
The Standard and Poor's 500, or the S&P 500, is the most-traded index globally. It tracks the 500 largest US companies, including titans like Nvidia, Microsoft, and Tesla. It's popular around the globe as the index lets people invest in a collection of some of the world's best-known businesses.
The S&P 500 is popular, but is it suitable for indices day trading? It experiences a medium amount of volatility and can make a suitable environment for technical traders due to its high volume. Because of its popularity, the S&P 500 is renowned by momentum traders who profit from extended moves.
Nasdaq 100
The Nasdaq 100 tracks the largest Nasdaq-listed businesses in the US. The index is heavily tech-weighted, with the sector accounting for around 55% of the index's capitalisation. That said, the Nasdaq 100 does include non-tech companies like PepsiCo and Dollar Tree.
Stocks in the tech sector typically experience large, quick movements, so the Nasdaq 100 is particularly suited to day traders. It moves most during US trading sessions and can provide exposure to some of the world's largest companies, making it attractive to US and international traders.
FTSE 100
The Financial Times Stock Exchange 100 index, or the FTSE 100, is an excellent choice for people who want to trade internationally. It comprises the 100 largest companies (by market capitalisation) listed on the London Stock Exchange (LSE), like AstraZeneca (healthcare), Shell (fuel), and HSBC (banking).
The FTSE 100 is popular amongst UK traders who utilise it to speculate on the economy's performance. It experiences moderate volatility, particularly during the UK trading session. However, it moves less on average than the Nasdaq 100, so it's best suited to people seeking setups with fewer fluctuations.
DAX 40
Another strong choice for international traders and people who want to speculate on the economy of Germany is the DAX 40. It comprises the 40 largest companies traded on the Frankfurt Stock Exchange. It's weighted based on capitalisation, so larger companies make up more of the index.
The DAX 40 is highly liquid and one of Europe's most-traded indices. It experiences high volatility and can move quickly during European trading hours. As such, the DAX 40 is worth considering for traders who live in the EU or those seeking large price movements.
CAC 40
France's CAC 40 is a benchmark index that tracks the 40 most significant stocks on the Euronext Paris. Like the DAX 40, it's capitalisation-weighted, so larger companies comprise a more substantial percentage of the index.
Although the CAC 40 offers reasonable liquidity, the DAX 40 overshadows it in terms of trading volume. As volatility is moderate (highest during French trading hours), it's popular with European traders seeking a relevantly stable market that still offers exciting opportunities.
Nikkei 225
The Nikkei 225 is Japan's flagship index. It comprises the 225 largest companies traded on the Tokyo Stock Exchange. The index is price-weighted, traded in Japanese Yen, and has the companies it tracks reviewed and modified twice yearly.
The Nikkei 225 experiences moderate to high volatility, making it one of the best indices for day trading and finding potential opportunities. It typically reacts to the moves of the US market, so it can be a good option for American traders who wish to speculate on Asian markets.
How to Day Trade Indices With ActivTrades
Now that we've covered the basics, it's time we dive into how to trade indices using a reputable broker like ActivTrades. The platform is widely available, offers a good selection of indices, and boasts TradingView integration, making it a solid platform for people to trade CFD indices.
1. Create and Verify ActivTrades Account
The first step is to register with ActivTrades and verify your account. You'll need to enter your country of residence, name, email, and password. Then, you'll need to input a phone number and some details regarding your financials. Afterwards, upload a photo ID to complete the verification process.
2. Open a Live or Demo Account
Next, access your ActivTrades personal area. It's the hub for all the platform's features. From here, open a live account using the option under the 'Accounts' tab. Alternatively, people can open a demo account under the same tab to practise day trading indices without risking real money.
3. Deposit Funds
Before you can trade, you must deposit funds. Click the green 'Deposit' button and choose a payment method. ActivTrades supports several deposit methods to ensure that everyone can fund an account. The broker supports bank transfers, credit/debit cards, and cryptocurrency payments.
4. Open ActivTrader and Find an Index
After depositing, press 'Access Platform' to open ActivTrader. From here, you can search for a specific index or view every option by clicking the 'Indices' tab. Add indices to your watchlist by clicking the '+' icon, then drag and drop them onto a chart to open the charting interface.
5. Analyse the Market
To find a potential opportunity, perform in-depth analysis. This can include analysing technical or fundamental factors, price/volume data, and reviewing the current market conditions.
6. Place a Trade
Once you've identified an opportunity, it's time to open a position. You can do so by clicking 'Buy' or 'Sell' under the assets tab. Then, decide on the position size, enter your take profit/stop loss levels, and press 'Place Order' to open the trade. Open positions are shown in the 'Positions ' tab beneath the chart.
FAQs
What Is the Best Day To Trade Indices?
The best day to trade indies will depend on your preferences. Due to the weekend, Mondays and Fridays typically offer the most volatility. However, Tuesday through Thursday can be better for traders seeking stability.
How Much Money Do I Need To Trade Indices?
People can start day trading indices with a small amount of capital, usually $10 to $100, based on the broker's terms. People can even trade for free by opening a demo account, which is useful for practising. However, profits cannot be withdrawn.
Is Trading Indices Profitable?
Day trading indices can be a highly profitable endeavour if approached with the proper mindset and a willingness to learn. However, profits aren't guaranteed, and traders can lose their entire deposit or more.
Can You Trade Indices?
Anybody can trade indices by registering with a broker, depositing funds, and opening a position. There are no set requirements to fulfil before trading the asset class. However, beginners should familiarise themselves with the space and use a demo account to practise before switching to real funds.
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