Trade Stock Indices

System

The Best method of trading index is to use a system & combine it with the pull back entry strategy. This is the best technique to ensure that your risk to reward is high enough thus improving your chances of making & earning more profits from trading charts.

The Pull Back - Retracement

As a stock index trader even before implementing your trade system you want to wait for a pull back, but how does a retracement look like - The price pull back is displayed and shown below.

Day Strategy - Strategies

In the above example the chart is of Germany DAX30 - The 1 Hour chart timeframe is used to look for a price pullback. In this chart the long term trend is upwards - in addition the main fundamental strategy that's being used for Germany DAX30 & all European Index at the time of writing is Q.E. - means Quantitative Easing - we shall explain more on this on our market sentiment for indices course. For now let's continue with the explanation of our strategy.

For the scenario previously demonstrated, you can observe a temporary pullback in this index, but now the Moving Averages (MAs) have pivoted and are beginning an upward trajectory - this provides our signal to execute a buy trade on this stock index. For added validation of this trading signal, incorporating another indicator, such as the RSI, is advisable.

Trade System - How to Develop a Strategies

From the above exemplification - we waited for a price pullback, this retracement quickly reversed and the upwards trend continued, moving average indicator turned up & RSI indicator moved to above 50 confirming our buy signal, a buy trade was then opened at the level of 11,810 & this upward market trend continued up to the index level 12,050. All these time our system shows the upward trend was gaining momentum as the two indicators, Moving Average crossover method kept moving up & the RSI technical indicators remained above 50 mark - RSI levels above 50 means that prices are closing higher than they opened.

Take Profit Order

Also, in this situation, because our trades are making money, we want to take our profit while we're still doing well. Keep in mind that our method still shows a buy signal, but we want to keep our profit while we're ahead, so we'll close this trade. This trade has gone up 2,400 points for us, making a profit of $236 per lot. We had started with 2 lots, making a total profit of about $560, and we had also added 2 more lots at 11,980, which earned us an extra 700 points in profit.

Remember for Indices 1 pip per lot/contract is equal to 0.1 dollars and not 10 per pip like in Forex. However, market daily market moves for indices is about 500 to 2000 points while forex daily pip movement is average of 50 to 100 points - therefore in indices even though the market moves are about 2000 points, profit per point is only 0.1 dollars - therefore when trading indexes if you make a profit of 2000 point the total profit in dollars is only $200 dollars like the illustration revealed above.

The other point is that the average lot/contract for indexes is lesser than the standard fx lot, while the forex lot requires a margin of $1,000, a standard contract for the above trade requires only € 85(about $90 dollars), this means the standard contract/lot in Index is 10 times smaller than that one in Forex - Therefore the lot used in the above trade is the equivalent of a forex mini lot.

The screenshot provided below displays our trade chart subsequent to the successful closure of our position and realization of profits.

Trade System - How to Develop a Strategy

System Specifications

Indicators

  1. 5 & 7 LWMA - Moving Average Cross over Method
  2. RSI - 50 Center Line Crossover Method


Rules

  1. Wait For Pull-back
  2. After Pull-back, look for entry signal - Both Moving Averages Moving Averages should be moving upward and RSI should be above 50 center mark.


Remember that this stock index usually goes up, so we only make trades to buy (Follow what the trend is doing).

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Stock Indices Broker