Indices trading enables traders to trade a diversified portfolio of stocks through a single index and dilute their risk in the financial markets. There exist several index trading strategies that help traders identify ideal market entry and exit levels.
In this article, we will talk about the popular indices trading strategies in-depth.
What are indices trading?
Indices trading is the trading of a group of securities together that make up the index. You trade an entire index on the basis of the average performance of all the securities combined.
The value of the index can be calculated by adding the prices of all the securities together and dividing it by the number of securities.
Top seven index trading strategies
Breakout trading strategy
Breakout trading strategy refers to identifying an area within which the index price has been trading over a period of time. As soon as the index price moves beyond this range, a breakout occurs that sends traders signals to enter or exit the market.
In this strategy, index traders take positions as soon as a particular trend in the market begins.
- When the index price breaks above the resistance level, it indicates a continued uptrend in the market and signals traders to take long/buy positions
- When the index price breaks below the support level, it indicates a continued downtrend in the market and signals traders to take short/sell positions
Bollinger entry strategy
Bollinger entry strategy determines oversold market areas and provides traders with ideal entry levels in the market. It consists of three bands –
- The middle band, which is the simple moving average of the index price
- The upper band that signifies the high market prices
- The lower band that indicates the low market prices
In this strategy, traders look for price breakouts above the upper band as it represents a continued uptrend. Hence, traders long trades as soon as the index prices move beyond the upper band in the indices’ price chart.
Trend trading strategy
In the Trend trading strategy, traders enter or exit a trade during a pre-determined continuous trend. When the index is trading in a particular direction, the traders assume that it will continue moving in the same direction in the long term and make long or short trade decisions accordingly.
- When the index is trading in the upward direction, traders enter a long or buy position with an expectation of the uptrend continuing
- When the index is trading in the downward direction, traders enter a short or sell position with an expectation of the downtrend continuing
Position trading strategy
Position trading strategy refers to holding onto an index position for a long period of time like a week, month or even a year. It ignores the short-term price fluctuations and provides traders with a clearer direction in which the index price is headed. In this strategy, traders aim to get returns from major price moves in the long term and analyze monthly price charts to place entry or exit orders accordingly.
Trading a long position with the Position trading strategy:
- When a trader enters a long position in index trading and the index prices continue to increase over a few months, it sends traders an entry order signal due to the continued uptrend
- When a trader enters a long position in index trading and the index prices start decreasing and keep on decreasing for the next few months or years, it sends traders an exit order signal due to the expected continued downtrend
Trading a short position with the Position trading strategy:
- When a trader enters a short position in index trading and index prices start increasing and keep on increasing over the next few months or years, it sends traders a signal to exit the market to avoid risks due to the continued uptrend
- When a trader enters a short position in index trading and index prices continue falling over the next few months or years, it sends traders a signal to enter more short positions in the market due to the continued downtrend
Scalping trading strategy
Scalping trading strategy refers to having a strict exit plan in the index market and making profits from small price movements. In this short-term trading strategy, traders place multiple orders during the day and exit the same as the trading day ends to profit-off small movements.
- When the index market is moving temporarily upwards during the day, the traders receive a signal to enter the market and exit soon before a downtrend occurs
- When the index market is moving temporarily downwards during the day, the traders receive a signal to exit the market to avoid downtrend risks
End of day trading strategy
The End of day trading strategy refers to trading indices near the closing market timings. The end of day traders focus on entering or exiting a market during the last two hours of the trading day as it signals a clearer picture of where the index prices are headed further. In this strategy, the traders aim to place long or short orders in volatile markets to benefit from the fluctuating prices.
- If the index prices follow an uptrend during the end of day trading hours, the traders receive a signal to place a long or buy order with an expectation of a continued uptrend the next day
- If the index prices follow a downtrend during the end of day trading hours, the traders receive a signal to place a short or sell order with an expectation of a continued downtrend the next day
Swing trading strategy
Swing trading strategy refers to placing trades and holding onto them for a few days or weeks. In this strategy, traders aim to take small profits in the short term and are affected by the minor price fluctuations. Traders place regular and multiple entry and exit orders in the market to capture potential gains in a short to medium timeframe.
- Traders receive a signal to enter trades when there is a continued uptrend in the index prices over a few days
- Traders receive a signal to exit trades when there is a continued downtrend in the index prices over a few days
Start trading indices with the strategies above
The strategies explained above are the top strategies that traders can use to trade indices successfully. With Blueberry Markets, you can trade all the globally leading indexes and make the most out of our tight spreads.