Written by Kristina Lozanova, Writer, on behalf of Easy Markets.
Cash index trading is a popular and indirect trading option, but it is particularly suited to new traders. Trading cash indices allows them the lenience necessary to get to grips with the financial trading market. Now, just as with all trading opportunities, spotting or identifying lucrative cash index trading opportunities is critical for making profits here.
By design, identifying opportunities in index trading is not as difficult compared to more complex, direct trade forms. All you need to do is understand how cash index trading works and what defines a cash index trading opportunity.
Understanding the cash index
A cash index can be defined as a tracking construct that’s used for trading through CFDs, aka Contract for Difference. The tool starts constructing itself by tracking and indexing the comparative performance records of all the securities included within that cash index. In other words, it’s a constantly updating index or collection of diversified premium securities.
As you can probably guess by now, each major trade market has its own cash index, and they act as benchmarks for cash index traders. Take, for example, the NASDAQ Index, the S&P 500 Index, the US DOW Jones Index, the Euronext 100 Index, the FTSE 100 Index, and the DAX 40 Index. Each of these are benchmark cash indices both regionally and globally.
Understanding the trade process
Now that you understand cash indices and which ones to use as benchmarks, you are halfway there. Next, we need to have a proper understanding of how trading in cash indices work. Cash indices are always traded via Contract for Differences. As the name suggests, CFDs are contracts with a broker in which a trader agrees to trade in the price difference between the opening and closing values of their cash indices.
Therefore, when you trade in cash indices, you have the unique advantage of potentially benefiting from both bull (upward) and bear (downward) market trends. Given that each major index consists of carefully calculated and diversified securities, the chances of suffering a heavy loss from cash index investments are very low. For a better understanding of the process and to get started with some practical experience in index trading, see this post on trading cash indices.
Understand the factors that trigger fluctuations in cash index trades
You are not making direct investments into any one security or even a sector, so the impact of price fluctuations in any one or more sectors is not likely to affect your diversified investment too much. However, once you get used to trading in general, you should be able to take advantage of major events that are likely to cause moderate – maximum fluctuations in the price of securities included in the chosen trade index.
Be on the lookout for news about major changes or events related to politics, the economy, corporate announcements, key business owners, natural disasters, and even epidemics. You will still need to figure out how the diversified index will be affected in summary by the relevant news. That is to say, the trader must decide whether the chosen index will go up or down in value.
Understanding Your Role and Advantage as a Cash Index Trader
By now, you should have a pretty decent idea regarding what cash indices are, how the trade works, and why they carry a much lower risk, as compared to direct investments. However, what is your role here as the trader? In what ways do you influence the outcome of your index trade investments?
You will have three primary decisions to make as a cash index trader:
- Your choice of cash index for the trade,
- Your judgement call on whether the chosen cash index will gain or lose value by closing,
- The amount you are willing to invest in the chosen index and your market estimation.
It is recommended that you start index trading with small investments, despite the low risk factor. All financial investments are inevitably subject to market risks and the cash indices are not exempt from that rule. However, there is certainly greater assurance of most losses being temporary due to the fact that benchmark cash indices are always updated and diversified by the world’s best financial experts, in order to keep both regional and global financial markets from collapsing.
In fact, that is the primary advantage of index trading. It’s the very reason why trading in cash indices is often recommended to relatively new traders. As a cash index trader, you are not choosing the securities which should be included in the index; nor are you investing directly into any of the chosen securities.
Instead, you are only trying to generate a profit by taking advantage of the price differences that exist between a bunch of highly diversified securities chosen by leading financial experts across the world. There is no clash of interest here either, which is quite uncommon in the field of financial trading. The only things you need to worry about are the three decisions mentioned already.
[Image – Csaba Nagy on Pixabay]
