What You Should Know About Indices Trading

According to popular belief, Forex is intended solely for currency trading. However, having carefully studied the capabilities of the terminal, one can find quotes for precious metals, stocks and derivatives. Forex indices today have become full-fledged trading instruments. What are indices created for? Originally, indices were intended for market forecasting, but now they have other uses as well:

First, it serves as a clear indicator of the state of the economy or of any industry or any other field of activity that it displays.
Secondly, it can serve as an object of investment in the stock market of any country or sector of the economy. Thanks to the principle of diversification, you can acquire a whole basket of instruments included in the index, reducing the risks of loss.
Thirdly, with the help of indexes, you can buy or sell completely exotic instruments.

Indices Definition

The modern financial market is not imaginable without tools such as various indexes. This may be an index reflecting the state of the financial or stock market of any state or industry index or volatility index. In any case, the idea of the index is that it is calculated from the prices or changes in the prices of the instruments it contains.

If you look at indices definition, then you will see that the index is an indicator that reflects the state of the market at a certain point in time. When investors’ expectations are positive, they acquire shares and the dollar price falls, in case of negative expectations, investors direct their capital at government bonds and strengthen the dollar. Indices are summary indicators that reflect the dynamics of price changes of individual securities. Thanks to them, it becomes possible to predict the future value of certain instruments.

The indices are calculated, as a rule, by the exchange itself based on the methods that the exchange develops and publishes. In these methods, the frequency with which the index is calculated is indicated. Moreover, modern technologies allow this recalculation with a frequency of one second. These calculations are published on the stock exchange and are a guide for buyers and sellers of the index.

What are Indices Needed For?

All investors seek to maximize income with the lowest risk. To do this, they use different behavioral scenarios under favorable and unfavorable conditions, as already noted above. Interest in government securities increases sharply at the first signs of an economic downturn because this instrument has a unique ability to hold large amounts of funds without a significant risk of their depreciation. As soon as the upward trend is observed, capital flows back into stocks with higher returns and higher risks.

All these manipulations affect both stock indices and the foreign exchange market. At the same time, there may be a discrepancy: stock market trends may change 2-3 days earlier or later than the state of the currency market. This time gap allows you to predict in advance the future behavior of some instruments based on the behavior of others. Afterall, financial market indices characterize one or another trend not so much by an absolute value as by dynamics: growth, fall, staying at a constant level, sharp fluctuations, waves, etc.

Advantages of Indices Trading

What is attractive about trading indices? One of the main rules of risk management is to create a portfolio of different securities. Traders who trade indices have a higher level of stability and reduced risk due to the distribution of investments in different assets using a single instrument. Trading indices allows you to use a credit lever in the amount of up to 1:50, which makes it possible to make these operations as profitable as possible while ensuring relative stability.

So, what indexes you should pay attention to when you decide to buy indices? The most important indices on Forex are Dow Jones, S&P 500 and DXY. They allow traders to get the most objective idea of what is happening in the market. Once you learn how to buy the indices, here are 7 most popular indices you should consider:

NSQ/USD is the NASDAQ stock market index that has been in existence for more than forty years. High-tech companies such as Intel, Apple, Microsoft, GE, Cisco have always been traded on this market. Due to this, the exchange index most objectively reflects the state of the innovation and technological industry.
DOW/USD is the index of the Dow Jones exchange, which predominantly includes companies from “old” industries. This index is called “industrial” and includes shares of the thirty most influential American organizations: AT&T, GE, Pfizer, Disney, etc.
S&P 500, or SP5/USD is an index that is calculated by Standard & Poor. It reflects the trend of common shares of the largest corporations in the world: Bank of America, GE, Ford, etc. All firms in the list are public companies and represent on the main American stock exchanges. As a rule, they are registered in the USA.
DAX 30, or DAX/EUR — the most important European index, includes the 30 largest German companies listed on the Frankfurt stock exchange: Deutsche Bank, Mercedes, BMW, Adidas, etc. Many of these firms are traded in the United States. The Frankfurt Stock Exchange reflects the state of the world’s markets when the US stock exchanges are closing at night.
CAC 40, or CAC/EUR — index calculated by the Euronext Paris exchange. It includes 40 French companies whose shares are traded most actively: L’Oreal, Michelin, Renault, France Telecom, etc.
FTSE 100, or FTS/GBP is an index that is calculated on the London Stock Exchange since 1984. It contains 100 companies whose capital forms about 81% of the total capital of firms trading on this stock exchange: HSBC, Aviva, BP, Vodafone, etc.
DXY, or USDX — an index that is calculated on Forex in the MT4/MT5 platforms. It reflects the position of the dollar relative to a basket of 6 influential world currencies: the euro, the yen, the British pound, the Canadian dollar, the Swiss franc and the Swedish krona.