Indices trading is very hard. Many skilled currency traders have tried to trade the indices but have failed miserably. New traders might not have any idea, but let us give you some examples of indices. You must have heard about UK100, US30 or the Dow jones. These are the top 100 companies in the UK and 30 companies in the USA. The shares of these companies are traded publicly. As the indices compromises of some of the big players in the world, the volatility is very hard. These companies react violently to any major economic decision made around the globe. So, if you want to protect the capital and stay safe, you have the proper way of dealing with this volatile market. Let’s explore the reason why people fail at indices trading.
Not understanding the volatility
The most common reason for loss is not understanding volatility. People don’t have any idea about the volatility of this market. They consider the volatility as normal even though they make some quick profit and losses. By the time you realize the importance of volatility, the average pips movement is more than 500 pips and it’s too late. You would have already lost a major portion of the account.
You have to study the historic price data of the indices before you participate in the market. By studying the historic price data, you will get the unique ability to take the trades with confidence. Being a currency trader, you might have learned trading with the demo account. But to trade stocks, you have study hard. Get used to the price volatility so that you can scale the trade accordingly.
Small trading account
The minimum lot size for trading indices is 0.01. You might be thinking that the value of each pip will be 10 cents only. But the contract size in indices is a bit different than the Forex market. For a standard lot of 0.01, the value of each pip will be $1. So, if the price movement is 500 pips, you might lose $500 with the smallest possible lot. So, it is very important that you trade with a decent amount of money. CFD trading in UK is becoming more popular since the investors are investing a big amount of money with a broker like Saxo. They have realized the risk of trading with a small account.
Many traders can’t afford the big account they will opt to trade indices with high risk. But trust us, it will never work. If you start with $2000, it won’t take much time to blow up your entire investment. You might turn into a $10 grand account but soon you will lose the capital.
Different trading strategy
To trade indices, you must follow a different trading technique. By using the traditional currency trading technique, you can’t cope with the volatility. But if you trade with a different trading technique, you have a high chance to manage the trades effectively. The average stop loss at currency trading might be 50 pips but for indices, it might be more than 200 pips. Even if you take trades with 200 pips stop, you have to be precise with the trade execution. If you trade with aggression, just wait for weeks and you will lose your capital.
Developing a trading method for trading the indices is not that hard. But its better you seek guidance from the professionals. The professionals can help you to create the perfect trading method and this will eventually boost your confidence level.
You must have a very strong mindset to trade the indices. Rules are rules and they are never meant to be broken. At currency trading, you might get away by breaking few rules but this will not be the case in the stock trading business. It’s a field where the professionals are competing against the global economy. So be prepared to compete like a professional.