Index trading can be unpredictable and volatile however with a sensible investment strategy and comprehensive market analysis, technical analysis and a solid risk management strategy it can turn out to be a very good investment. Indices trading can be done big investors who invest a lot of funds in stocks but also novice and small time retail investors also can invest in stocks through mutual and index funds.
Whatever amount of money you invest, whether it is $100,000 or $500 the rules are the same for both Indices Trading and stock trading.
If you follow the five golden rules set out below you will make a success of indices trading.
Learn to trade:
If you are a novice then the most important thing is to learn about stocks. The first step is learning about when to buy and when to sell a stock. You should first learn about the stock market how to do a market analysis. How the market works and what are its characteristics. Also your education should encompass technical analysis, stock indicators and candlestick chart patterns. Without these tools you canít manage your portfolio of stocks or indices.
Market Analysis is as important as everything else. Researching the market is vital. Keep track of what is going on in the market, which stock indices have the best returns, which companies and stocks are worth investing in. The current day to day data of stock indices can help you in your research but donít base your decision entirely upon the current information as looking at historical data can make your vision clearer about the market scenario.
Novice traders often make the mistake of investing too much of their capital into one trade; investing all your money is not wise. A rule of thumb is to invest no more than 5% of your risk capital on each trade. So if you have capital of $100,000, invest it in lots of $5,000. This is prudent risk management, as is using stop loss and market orders wisely. Also learn how to use CFDís or ETFís to hedge your investment portfolio.
Invest in multiple segments; donít invest in just one sector or one company. Diversify your investments so that sectors that are gaining will offset the sectors that are falling.
Donít pull out all your profits:
Donít be in a rush to drawdown all your profit all at once. Especially in a rising market; take out your profits in small amounts. If your sector is in a boom and beating the overall market piggy back onto your initial investment using some of your profits.
Following the above should enable you to trade indices successfully.