Trading US Indices: the Hidden Secrets!
Valutrades gives you the opportunity to trade Stock Indices from all over the world. These indices offer traders a great advantage in flexibility and speed compared to buying and selling shares of individual companies.
Also, as a CFD on Valutrades MT4 or MT5 platforms, you can go long or short, depending on what your analysis tells you.
Why are US Indices so Important?
In this article, we will look specifically at US Indices. There are 5 different indices available and they represent a complete cross-section of the companies based in the largest economy in the world.
For example, if you felt that the global banking industry was going to rise or fall you might trade the S&P 500 (US500). If you thought that the tech sector would rise or fall, you might want to trade the NASDAQ (US100).
Very often all these indices move in tandem with each other so you might end up trading based on the global economy, Interest Rates, or geopolitical issues. The chart below shows all 5 US indices roughly following the same path over a one-month period.
However, when one index lags behind the others, this can give us clues and opportunities. For example, recently the 3 main indices were doing well but the Russell 2000 was lagging behind. In an ideal world, the economy would find a balance and all market sectors would catch up. In this case, they did just that, and a “Buy” trade on the Russell 2000 paid off.
Also, companies are affected by the same factors that affect currencies, but sometimes in the opposite direction. For example, the value of the USD will rise when the US Federal Reserve raises Interest Rates. On the contrary, companies see Interest Rate rises as adding to their costs and, therefore, the indices may fall.
Dow Jones Industrial Average (US30)
One of the oldest indices in the world, the DJIA represents 30 of the largest companies in the US. The current value of the DJIA is based on a weighted average of the share price of these 30 top “blue-chip” companies like Coca-Cola, Disney, and Microsoft.
Standard & Poors 500 (US500)
As the name implies, this index goes much deeper into the US economy by looking at the top 500 companies, regardless of their market sector. Unlike the US30, the US500 is based on the market capitalisation of these companies (not the share price) so certain factors may have one moving against the other. This contrary movement can also give us opportunities.
This index is often referred to as the “Tech” index but that is not quite true. You will find pharmaceutical, travel, and entertainment companies here, just to name a few. What you won’t find here, however, are big banks.
Having said that, when the tech sector has problems or windfalls, the NASDAQ may be the first to show it. This, as well, gives us the opportunity to look at other indices to take financial advantage.
The NASDAQ is also based on the component companies’ market capitalisation.
The Russell 3000 Index covers the top 3000 companies ranked by market capitalisation in the US. The Russell 2000 Index, as found on Valutrades MT4 and MT5 platforms, is a look at the lower 2/3 of the Russell 3000. Therefore, if the other indices are based on “Large-Cap” companies, the Russell 2000 is based on “Small-Cap” companies.
These companies may be affected by different factors than their larger cousins and, therefore, can give us trading opportunities when we see an imbalance.
S&P 400 (US400)
To fill the gap between the S&P 500 “Large-Cap” index and the Russell 2000 “Small-Cap” index, we have the S&P 400 “Mid-Cap” index.
You guessed it! The components of this index are the 400 companies just below the top 500 companies in the US. Outside of the US, most people would not recognise the names of these companies as they may be regional utilities or medium-sized manufacturers, as examples. However, well-known companies like Harley-Davidson and Goodyear are on the list.
As mentioned above, there are a lot of advantages and opportunities available in trading indices. But like any instrument that you trade, if you see an opportunity, you need to find out WHY it has occurred before you make a trading decision.
Knowledge is power!