Trading indices: Why is indices trading advantageous?

16 2 2019 - Pas de Commentaire, soyez le premier

I am often asked why I only trade indices. Explanations on the advantages of indices for traders.

Indices cannot be manipulated


In a world where people are becoming more and more paranoid, I am always surprised that very few traders start trading indices. Yet, indices are the least manipulable financial instruments. Forex does not have centralized quotations, all brokers offer their own price, and cryptocurrencies have such low volumes that with a few million euros you can do what you want on it.

Manipulating an index is not possible because you don't really buy an index. You can invest any amount you want in an index, let's be crazy, 100 million euros at once. You will have shifted it a few points and the algorithms will detect the inconsistency and rush to return it to the normal price. They will take advantage of the opportunity by making you lose considerable amounts of money.

Trading indices Why is indices trading advantageous 300x200

What makes an index change price?

Because what makes the index change is not you, it is the prices of the shares that make up that index. It is a weighted mathematical average of 30, 40, 100, 500, 2000 companies at the same time according to the indices. So to manipulate an index, the cost would be infinitely higher than the expected benefits. Tens of thousands of companies’ shares would have to be bought or sold at the same time on tens of thousands of listed companies.

You are not going to spend 100 million euros to shift an index by 20 points when with the same amount you could control Bitcoin or a very specific share :). It's also the end of urban legends, they triggered my stop loss (paranoid mode of a bad trader who looks for a pretext so as not to accept the fact that he was bad). Of course it's obvious, we're going to spend 50,000,000,000 euros to trigger your stop loss on a micro lot at €1. The great strength of indices is that no one has the financial capacity to manipulate them. Moreover, the price of the indices is global, it is the same for all traders.

Money management is integrated into index trading

It can be said that, with an index, Money management is already integrated because it is simply a basket of shares. You don't put all your eggs in one basket. If you buy Nasdaq 100, you are diversifying into a hundred or so American high-tech companies. By buying the CAC 40 index, you are making a greater contribution to the petrochemical industries. With the Footsie, you make a big contribution to financial companies. When trading the Dax 30, the weight of industry is higher than many other indices. There is therefore great subtlety in trading indices. You have to know them. And of course, I am not talking about specialized indices, such as sectoral indices, which are more sensitive than more diversified ones.

There are lower risks trading indices

Risk is the death of the trader. You really have to get that into your head if you want to have a chance in trading, you have to avoid risk. Risk is lucrative once, twice, three times and the fourth time it takes you down. It is your main enemy with yourself in trading.

Trading a stock is risky because the CEO may have a problem, the company may be sued. The shares could increase or decrease by 10%, 25%, etc. there are some every day. Stock market novices are excited about this because they imagine of course that they will make 25%. They can also take a -25% slap in the face and take years to recover, all the more if they have low capital.

An index that loses or gains 10% is an historical event. It is still talked about 20 years later.

Trading an index avoids the risk of bankruptcy

In addition, your index cannot go bankrupt unlike a company where you lose all your investment. If a Dax 30 company goes bankrupt, it is automatically replaced by the 31st German company. The effect of this bankruptcy on the index is therefore considerably limited. But if you hold this share, you lose everything.

Indices benefit from the global economic situation

Since you don't put all your eggs in the same basket, what you do by buying a cryptocurrency, a stock or trading in Forex, you benefit from the dynamism of the global world economy because you invest in 30, 50, 100 companies. If one of these companies is in trouble, that doesn’t stop the index from rising.

Similarly, with indices you smooth out the risk. You benefit from the positive or negative dynamics, depending on whether you buy or sell the index of the global economy. With a little experience, you can see the medium to long-term trend on indices. So if you don't have an aggressive short-term strategy, you can let yourself get carried away.

Each indices has its own personality

That's certainly one of my favourite things about indices, they all have character. Indices all have their own personality, differences that adapt to scalping, day trading or swing trading. They are like human beings, they are typified, and they have their own character traits. And you can inevitably find an index that matches your personality as a trader.

Of course, in the same way that you do not behave in the same way with an aggressive or passive person, you must have techniques specific to each indices.

Index trading is ethical

This may come as a surprise, but trading indices is ethical. You can explain it to your friends who judge traders without even having the minimum knowledge of economics. By buying or selling indices, you have absolutely no impact on the share price, and thereby on the lives of employees, and all the other blabla we hear from the media. You have no impact on countries' debt, you have no impact on raw materials, etc. You buy and sell an index. Directly investing in an index does not change stock prices. You have an absolutely neutral ecological footprint.

On the other hand, if your friends have life insurance, they have an impact on the economic life and the lives of "people". For example, they speculate on the debt of countries. Generally, they will not appreciate you explaining this to them, but you have to get them out of their economic obscurantism.

Conclusion on trading indices

Why trade indices? Index trading is a secure form of trading with integrated money management. The risks of index trading are lower than on other products because an index cannot go bankrupt.

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