Nowadays, online trading can be engaged from almost anywhere and at any time. With a computer or a mobile device and an internet connection, you can easily access thousands of financial assets and take advantage of their price movements.
Among tradable assets on the internet, stock indexes (also known as indices) are considered one of the best things to trade. This article will show you 4 advantages of trading indices online.
- Indices Trends Can Be Easier to Predict
The price moment of a stock market index is based on the price movements of the underlying stocks that constitute the index. Normally, the price movement tends to be in one direction – when the global economic outlook appears to be positive, the prices of most equities will increase constantly, therefore the indices will also move upward. The indices market may maintain its uptrend for a long time, and it’s not easy for that trend to turn sideways or reverse completely.
In the forex market however, trends are less long-lasting. The price movement of currency pairs can change within a day. Even if you trade on a long-term chart such as daily, announcements from central banks or economic data releases can easily break a trend which seemed very stable before.
- Track The Overall Health of an Economy
Indices are particularly good tools in gauging the strength of currencies. By looking at the performance of indexes, you can easily assess the current state of an economy.
For example, the FTSE 100 is a share index of 100 companies with the highest market capitalisation on the London Stock Exchange. The performance of this index will give you an indication of the strength of the UK economy, plus GBP. So, observing the FTSE 100 may help you get an advantage over other investors when analysing the GBP price.
- Indices Are Less Volatile
Forex traders often see periods of fluctuations and volatility, which are usually not easy to trade, remaining for long periods of time. The indices market is usually different, however. Indexes often move continually in a trend over time (upward or downward), making the analyzing work easier.
Volatile moves may sometimes appear in the indices market, but the major trends will quickly return and dominate.
- Large Daily Movements
Indices such as the DJIA (Dow Jones Industrial Average) or the Nikkei 225 move an average of 1000 points per day, but currency pairs often move 50 to 150 points only.
Another advantage of trading indices is that a point of index movement is worth less than a currency pair movement. This allows traders to implement money management more easily.
The Bottom Line
You have now discovered the major benefits of indices trading. In general, it is a better option compared to trading currency pairs or individual stocks, especially if you’re new to trading or you have a low appetite for risk.
Indices can be traded via contracts for difference (CFDs) at many forex brokers. If you’d like to practice trading indices, open a demo account first. You can access and trade multiple stock indexes without risking real money, until you’re ready to trade for real.