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Mastering Indices Trading with Technical Analysis

To navigate the landscape of index trading successfully, you need effective analysis techniques. That's where technical analysis comes in.

Here we explain the basics of indices trading, dive into the use of technical analysis, and highlight why it's crucial for trading success.

But first, we will briefly review what our world-famous athletes taking part in our online trading competition, the FlowBank Championship,
traded last week. 

The ranking is led by Jan Blachowicz, Polish UFC fighter. He is followed by the German duo Alexander Zverev, tennis player, and Dimitrij Ovtcharov, table tennis player.

Status: 26.05.2023

The athletes are trading a mix of instruments from stocks, ETFs, crypto, and forex to rise to success. 

 Last week we saw a large volatility in stock market indices as traders got nervous as approach the "X date" of the US debt ceiling. But earnings of Nvidia improved market sentiment, sending US market indices soaring back to highs of the week. 

Nvidia shocked markets as its stock soared 25%, making it the 5th largest publicly traded company globally in market cap.

Some athletes continued to trade Big Tech stocks and also ETFs. We observed various strategies, with some athletes holding the stock for a few days and some increasingly doing very short-term trading.

Understanding indices and how people use them

Indices act as a snapshot of the overall market performance, representing a group of stocks that give us insights into the market's health. 

People use indices in various ways:

  • Benchmarking performance: Indices provide a reference point to assess how individual stocks, portfolios, or investment strategies are doing.
  • Analyzing market trends: By studying historical price patterns, traders can identify trends and predict potential price movements.
  • Assessing market sentiment: Indices reflect the overall sentiment of market participants, giving valuable insights into market dynamics and investor confidence.

Trading index CFDs

Contracts for Difference (CFDs) offer a flexible way to trade indices. Unlike traditional methods, CFDs let you speculate on index price movements without actually owning the underlying assets. There are several global indices to choose from on the FlowBank app.

Source: FlowBank app

 

Index CFDs represent the value of an underlying index and allow you to take both long and short positions. CFDs offer advantages like leverage, diversification, and the ability to profit in both rising and falling markets.

Example strategy: MACD indicator

The MACD (Moving Average Convergence Divergence) indicator is a powerful tool that’s popular among index traders. Here's a simplified guide to using the MACD indicator:

 

  1. Understanding the MACD: It consists of two lines - MACD line and signal line - and a histogram. Crossovers between these lines and divergence from price can signal trend reversals.

 

Here is the MACD indicator on a chart for the DAX 40 index (ticker FDX)

Source: FlowBank app

 

  1. Identifying Trend Reversals: Bullish crossover (MACD line above signal line) suggests an upward trend, while bearish crossover (MACD line below signal line) indicates a downward trend.
  2. Confirming Divergence: Divergence between price and MACD can signal potential reversals. Bullish divergence occurs when the price makes lower lows and MACD forms higher lows, while bearish divergence happens when the price makes higher highs and MACD forms lower highs.
  3. Overbought and Oversold Conditions: MACD can indicate overextended market conditions. Significant divergence between MACD and signal line suggests overbought or oversold conditions.
  4. Setting Entry and Exit Points: Use MACD crossovers, divergence signals, and other tools like support/resistance levels for entry and exit points in trades.

 

By incorporating the MACD indicator into your indices trading strategy, you can gain valuable insights into trend reversals, momentum, and overbought/oversold conditions.

Key indices for trading

DAX 40

The DAX 40 represents the top 40 companies listed on the Frankfurt Stock Exchange, serving as a major benchmark for the German stock market.

FTSE 100

The FTSE 100 represents the 100 largest companies listed on the London Stock Exchange, providing insights into the UK stock market's performance.

SMI 20

The Swiss Market Index (SMI) is a benchmark stock market index representing the performance of the 20 largest and most liquid companies listed on the SIX Swiss Exchange, providing insights into the overall Swiss market.

SSMI_2023-05-24_17-18-13

Source: FlowBank / TradingView

 

Looking at the current chart for the SMI, several MACD crossovers can be observed over the past few days on the 2hr candlestick chart. The next bullish crossover could offer upside potential, though traders need to consider other factors, like the prevailing trend. If the overall trend turns downwards, any trade to buy will have a lower probability of success than a trade to sell in line with the trend.

Conclusion

By incorporating technical analysis into your indices trading journey, you gain valuable insights into market trends, price patterns, and sentiment.

Analyzing key indices like the DAX 40, FTSE 100, and Swiss Market Index (SMI) using the MACD indicator can provide valuable information about market trends and potential trading opportunities.

Remember to consider historical performance and use the MACD indicator as a complementary tool alongside other analysis techniques.




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