Trading Equity Index CFDs

Trading Index CFDs

Trading Indices via CFDs is one of the simplest ways to trade the fluctuations of the world’s major equity indices. An equity index measures the broad movements of an equity market. CFDs allow trading the difference between the current price and the future price of a particular index. Index CFDs imitate the index behavior and offer traders the exact same benefit as they would have if they have traded the index itself.

Offering Speculation and Hedging

By opening positions on index CFDs, traders can speculate on the general market’s movement or hedge against the market risk of their portfolio.

(i) Speculation on the current market trend

(ii) Hedging existing positions of individual shares

Why Trading CFDs on Indices?

Indices-trading is supported by enormous liquidity and that is transformed into tight spreads or else into a limited trading cost. Trading cost is extremely crucial for derivative traders.

News-Trading

Indices do not trade abnormally during news releases as other instruments do. All experienced Forex traders know that during news-releases the price moves in the opposite direction before creates a trend according to the impact of the news. That opposite price movement activates the narrow stop-loss orders and traders are getting stopped-out. Indices on the other hand usually trade according to the news without opposite price movement, and that makes them ideal for news-trading. Most of the times you can place narrow stop-loss orders without a problem.

Swing Trading

Swing trading is one of the most profitable ways to trade Index CFDs. Swing traders open positions that may last for a couple of days to a couple of weeks. They are after mid-term trends and returns of 1%-10%. CFDs due to their leveraged nature can transform 1-10% returns of the underlying asset into 50%-500% returns in terms of the contract’s value. Furthermore, if you trade CFDs on futures you can enjoy another great advantage. CFDs on futures do not charge overnight SWAP rates. That means that you can open a position on Dow-30 or on S&P 500 that will last for weeks without having to pay a single cent on overnight rates. They only thing you should care about is not getting stopped-out. Swing traders that can identify strong-trends and place their stop-loss wisely (below 2 major support/resistance levels) are able to achieve extreme profits.

Hedging against market risk

If you have bought or sold individual shares you are exposed to a particular level of market risk. Index CFDs constitute an easy way to hedge against this risk and avoid trading ‘naked’. Index CFDs imitate and represent the market itself and therefore allow traders to hedge against any abnormal market movement that is triggered by unexpected news and events (macroeconomic, political, strategic etc.).

 

Information about Stock Indices you May Trade via CFDs

A stock index represents the average movement of top shares that are listed on a particular stock exchange. For example, the Dow-30 represents the 30 most important influential companies in the US Markets. FTSE 100 represents the 100 largest companies listed in the London’s LSE stock-market etc. Here are some important global equity indices you may trade via CFDs:

(i) US Markets: Dow Jones Industrial, Nasdaq, S&P 500, Russell 2000

(ii) European Markets: German DAX, France CAC-40, Euro Stoxx 50, UK-100

(iii) Asian Markets: Hang Seng, Nikkei-225 Japan, ASX-200 Australia

How can these Indices be Calculated?

Two approaches for calculating world indices:

(i) Most indices are formulated using a capitalization-weighted average. That means the greater the capitalization (price x number-of-shares) the greater is the impact of the share on a particular index.

(ii) On the contrary, the US Dow Jones and the Japanese Nikkei are price-weighted indices. That means that the greater the price of a share the greater the impact on a particular index. Higher-priced shares influence more Dow-30 and Nikkei than lower-priced shares.

 

Testing any Strategy on the Dow-30 Industrial Average

Some years ago an experienced analyst told me “Test any strategy in the Dow-30 before testing it in any other stock index if a strategy is not effective when applied on Dow-30 it will not be effective anywhere else”.

--Traders who can understand the meaning of this statement may consider themselves semi-advanced or advanced index traders.

Table: The composition of Dow-Jones Industrial Average (DJIA).

 A/A

 DJIA Composition

 Weigh

A/A

 DJIA Composition

 Weigh

IBM

10.99%

16 

Disney

3.01%

Chevron

6.34%

17 

JPMorgan Chase

2.68%

3M

5.69%

18 

Dupont

2.57%

McDonalds

5.18%

19 

Verizon Communications

2.48%

Caterpillar

5.14%

20 

Merck

2.35%

United Technologies

4.97%

21 

Coca-Cola

2.08%

ExxonMobil

4.91%

22 

AT&T

1.96%

Travelers

4.42%

23 

Microsoft

1.54%

Procter & Gamble

4.25%

24 

Pfizer

1.52%

10 

Johnson & Johnson

4.23%

25 

General Electric

1.29%

11 

Boeing

4.12%

26 

Cisco Systems

1.16%

12 

Wal Mart

3.82%

27 

Intel

1.14%

13 

Home Depot

3.66%

28 

Hewlett Packard

0.92%

14 

American Express

3.41%

29 

Bank of America

0.65%

15 

UnitedHealth Group

3.04%

30 

Alcoa

0.48%

 

Comparing CFD Brokers offering Index Trading

Here is a basic comparison between regulated CFD providers offering also segregated client bank accounts and have been in the market for at least 5 years.

CFD PROVIDER

ASSETS

TRADING PLATFORMS

TRADING ACCOUNT

WEB-SITE

XM

Asset Classes:

· Forex

- Metals

· Energy

· Indices

· US 30

· US 100

· US 500

· UK 100

· Japan 225

· EU Stocks 50

· Hong Kong 50

· Germany 30

· France 40

· Switzerland 20

· Australia 200

· Netherlands 25

· Spain 35

· Italy 40

■ Web Trader

■ MetaTrader4

■ MetaTrader5

SCALPING: YES

CFDS ON FUTURES

Trading Also Index CFDs on Futures:

· Dow-30

· S&P 500

· Dax-30

$5 minimum deposit

 

LEVERAGE:

1:30

WEB-SITE:

 

► XM Web

FXCC

Asset Classes:

· Forex

· Gold & Silver

· Indices

· Dow Jones 30

· Nasdaq 100

■ MetaTrader4

■ Sirix WebTrader

■ Mobile Traders

SCALPING: YES

$100 Minimum Deposit Amount

BONUS:

30-100%

LEVERAGE: 

1:300

WEB-SITE:

 

► FXCC Web

HOTFOREX

Asset Classes:

· Forex

· Metals

· Energy

· Shares

· Indices

· US 30

· US 100

· US 500

· UK 100

· HKG33

· Germany 30

· France 40

· Australia 200

· Spain 35

· Italy 40

· SUI 30

■ MetaTrader4

■ WebTrader

■ Mobile Traders

SCALPING: YES

Free VPS Server for deposits of more than $5,000

$50 Minimum Deposit Amount

WELCOME BONUS:

40-100%

LEVERAGE: 

1:1000

WEB-SITE:

 

► HotForex Web

DUKASCOPY

Asset Classes:

· Forex

· Metals

· Energy

· Indices

· US 30

· US 100

· US 500

· UK 100

· Japan 200

· EU Stocks 50

· Hong Kong Index

· Germany 30

· France 40

· Switzerland 20

· Australia 200

· Spain 35

■ Jforex Platform

■ WebTrader

■ JavaTrader

■ Mobile Traders

SCALPING: YES

 

$100 Minimum Deposit Amount

WELCOME BONUS:

10% under a policy

LEVERAGE: 

1:300

WEB-SITE:

 

► Dukascopy Europe

 

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Trading Index CFDs

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CFD Trading Orders

CFD providers offer a wide range of trading orders. A trading order is actually an instruction to your provider in order to buy or to sell a specified financial asset on your behalf. The proper use of CFD orders adds control to your positions and may reduce significantly your trading risk. Note that different CFD brokers may provide different types of trading orders and therefore before choosing a broker you should ensure that the trade orders you need are available.

 

Two Tips for Avoiding Mistakes when Placing CFD Orders

Making mistakes in orders placement can be extremely painful when trading derivative products. Here are two simple tips to minimize your risk, especially if you are a beginner:

(A) After you choose a CFD broker you can start a practice account before trading for real money. In that way you may test risk-free any order types and its results on your portfolio. That is useful especially as concerns complex orders as the OCO order type presented below.

(B) Furthermore when you commence trading for real money you are advised to start placing small orders before placing your actual order sizes. For example before you place an order worth 2 lots on Crude Oil you may place a pilot order worth just 0.1 to be sure about the spread charged and the margin used. When your small order is executed then multiple the results x20 and you will be able to forecast the impact of the 2 lots order before you execute it.

Main Types of CFD Trading Orders

 

(1) Market Orders

A market order executes a long/short trade at the current price quoted on the market. A market order is always executed immediately.

(i) If you are opening a Long (buying) position then you shall buy from the lowest-priced seller

(ii) If you are opening a Short (selling) position you shall sell to the highest-priced buyer

The risk when you place a market order is that you may buy or sell an asset at any price. Most commonly that risk is very low due to the extreme liquidity of financial markets. But be aware that during times of news releases that risk can become huge.

 

(2) Stop-Loss Orders

Using a stop order, traders can limit their trading risk to a desired level. Stops allow traders to close any position at a desired price level and avoid further loss. The trader can place in advance or afterwards a stop-loss order. Using a stop-loss order you may:

(i) Close a Long (buying) position when the price of an asset has climbed above a specified price

(ii) Close a Short (Selling) position when the price of an asset has dropped below a specified price.

Stop-Loss Orders are very important for all CFD traders as a tool of preventing huge losses if the market has moved against their expectations.

Do not Place Stop-Loss Orders very Close

A small tip here is not to place a stop-loss order very close to the current price. If you tend to place stop-loss orders very close then the Market Noise will stop-you out in most cases. Leave some space for you stop-loss. Personally I use the second support / resistance level as my stop-loss level and not the first level as most traders do. Of course the wider the stop-loss the greater the loss potential, therefore prefer to open less leveraged trades in order to be able to place the right stop-loss without risking much money.

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