The Australian share market has several indices, which are benchmark indexes that allow traders and investors to measure the performance of the broader market. Trading indices is a great way for traders to gain exposure to the broader economy without trading individual shares, bonds or commodities. Platforms like MT4 Australia make this market more accessible. However, newer traders remain sceptical. Worry not because this guide details everything a beginner should know about trading indices.
Indices are benchmark indexes that allow traders and investors to measure the broader market’s performance. Trading indices is a great way for traders to gain exposure to the broader economy without trading individual shares, bonds or commodities.
There are several types of indices:
- Share price index (SPI) – this measures how much an average share in each index changed over time; it uses market capitalisation as a weighting system. In other words, this means that larger companies have more influence on an SPI than smaller companies do;
- Stock index – these provide information about broad economic conditions because they’re based on movements in prices of stocks on major exchanges like Australia’s ASX200;
- Commodity price index – these track prices for commodities such as gold and oil; and
- Bond yield index – these track long-term bond yields across various countries where interest rates can vary widely
Future trading strategy
Futures are contracts to buy or sell a fixed quantity of a commodity, currency or index at a predetermined cost on a future date. Futures trading is a method to speculate on the future value of an asset. The buyer of a futures contract has the privilege but not the obligation to purchase (or sell) an asset at a specific date and price.
The seller of a futures contract must deliver whatever was promised in return for receiving payment now, even if other market conditions have changed by delivery time. The seller is “short” on the obligations expecting to buy back the obligation when it matures at lower prices—and thus receive more than what it was sold for originally.”
Call vs Put Options
The most important thing to remember when buying calls is that they have limited risk and unlimited profit potential if you expect the index will rise in value in the future.
If traders expect that an index will fall in value, then buying a put option is a simple investment strategy that will profit if that occurs. A Put Option gives the owner the liberty to sell an underlying asset at a specified price (the strike price) within a specified period (until expiration). The seller of this contract pays the buyer for this privilege.
The Australian market is dynamic, and examining market trends for each investment is tedious. However, using platforms like MT4 Australia that provide users with updates and index-based market information can help you make smarter decisions.
Stop Losses and Trailing Stops
- Stop-Losses: The stop-loss is a price level you set to protect your investment from potentially adverse price action. You can set a stop order when you buy or sell an instrument, which means the stop order will be triggered if the market reaches your specified price level.
- Trailing stops: This is similar to a stop-loss, but instead of setting a fixed price for the trade to trigger, it continues trailing behind the position as it moves higher or lower in value. It’s important to note here that trailing stops will not guarantee any profits because prices may go against you at some point and move beyond the level where you set your trailing stop order.
- Scaling into and out of positions: When entering into an index trade, it’s always better practice not only by professionals but also by beginners as well as part-time traders who are interested in making money through investing in indices. That said, scaling into an index trade involves purchasing shares over time rather than all at once, while scaling out involves selling off portions of one’s position over time instead of all at once