Advantages of Indices over Forex Market
What are some of the advantages of trading Indices over trading currencies? Below are some of the advantages of trading Indices over Stocks.
Indices have better trends than currencies
The stock index market moves are based on stock market price moves. Stock market price moves tend to move in one particular direction. In times of economic growth the prices of stocks increase constantly meaning the stock index that track the prices of these stocks will also continue moving upward and maintain an upward trend. While in Forex currency market moves may not be well pronounced as the market moves in stock index.
Indices have less consolidations and market whipsaws
Unlike forex currencies that can consolidate for long periods of time and thus producing many whipsaws, the stock market indices rarely consolidate for long periods of time, the stock index will show a particular trend direction at any one given moment – either upward or downward. This means there will be less whipsaw generated when trading stock index and every trader knows that less whipsaws equals better odds of making profits.
Indices move more points per day than currencies
Stock indices will move an average of 500 to 2,000 points per day; compare this to FX currencies that only move 50 to 100 points per day.
Another advantage of this is that 1 point in stock index move is equal to $0.1 and not $10 dollars like in FX trading. This means that when trading stock index the average profit per 1 pip move is less, therefore a trader can implement better money management in stock index as the minimum price move per 1 pip is not that big. At the same time because the average move in stock index is an average of 500 to 2000 point traders will still make a good profit even if 1 pip move is equal to $0.1
Lower Margin per Lot Requirement
The margin requirement per 1 lot for stock index varies from $5 dollars per lot to about $250 dollars depending on the stock index being traded. In FX the margin required per lot is $1,000 dollars per 1 lot. Therefore a trader needs lower capital to trade indices as compared to FX Trading.
Indices are More Predictable
For stock index, their market moves are purely based on stock price moves, if stock prices move higher stock index also move higher, if stock prices move lower stock index also move lower. This makes the stock index more predictable than FX currencies.
Indices are Less Complex and More Localized and Less Global
The fact that a stock index tracks stocks within a single stock exchange market and in additional only tracks a limited number of the top blue chip companies really reduces the complexity of a particular index. For example the Germany DAX only tracks the best 30 companies in Germany Frankfurt Stock Exchange Market – meaning a trader following this index can concentrate their focus on keeping track of only 30 companies within the Frankfurt Stock Exchange. Where as in FX trading Currencies is more global and the fact that FX currencies are traded in pairs therefore a trader has to keep their outlook on a more global focus and also keep track of developments in two economies even if the only trade one FX currencies.
Also consider the fact that one currency is being traded by many traders all over the globe and the supply and demand is determined by pure speculation – and to be good in FX you have to learn how to accurately gauge this demand supply to become profitable, unlike stock index where the indices trends are determined by their respective stock price moves – and to be profitable you only need to follow stock prices that are used to calculate a particular index – something that is easy to do; because stock prices always move up, secondly when economies are doing well, people keep investing in stocks and stock prices keep going up, thirdly, the indices track blue chip companies, blue chip stocks in any stock market always go up. Therefore, the stock market indices have an advantage over FX as they require less analysis than the FX market.