Stock Indexes Trade Strategy
Stock indices track performance of the best stocks in a particular stock market. Because the stocks that are being tracked are the top traded stocks from the best companies chosen from the best sectors & industries in a particular economy, it means that the value of these stocks is likely to keep going up over time & therefore index that track these shares will also keep going up.
In the stock market there is one consensus among all traders & that is stock prices always go up over time. Historically, market has proven this theory over and over again. Our strategy will be based on this theory.
Our stocks stock indices trading strategy is to only open buy trades when trading the indices. The trades will be opened when there is a pullback in the index level.
Strategy
- Wait for price pull back
- Open a buy position
Retracement
As a trader even before opening a position, you want to wait for a pull back, but how does a pullback look like - The price pullback is displayed & illustrated and shown below.
This is the point at which as a trader you open a buy trade. Using this setup gives you the best risk : reward ratio that ensures your trading strategy is profitable.
Example Trades Using This Strategy
The example below shows a few trades that were opened using this strategy.
This example shows that even though the trend is generally upward, there is always a price pullback that traders can use to enter a buy position. The best thing about waiting for pullback is that you reduce your drawdown to a minimum & thus chances of you trading strategy becoming more profitable are increased.
In the above example the first trade opened after the pullback was opened at 4325 level, second trade was opened at 4350 level. The index value then went up to 4381 level where it is now. A trader that waited for the pull back to buy this stock index is already in profit as compared to another that bought near the top and are now in drawdown & they now have to wait for price to go back up to get back to break even.
Where to Take Profit
On the example below - there are a few open trade orders that are already in profit. These trade orders are shown below. Most traders would want to keep their trades open & get to scheme more profits from the market and they might be right - but also it's very important for a trader to know when to take profit and you don't take profit once the market starts to retrace, no - you take profit when the market is headed way up as shown below.
Open Trades - Time to Take Profit While the market is still heading upwards
Trades Closed - Take Profit executed & profits booked
As a trader you want to follow the above strategy when trading stock index, as you reduce the drawdown & you spend less time to make profits because you do not have to wait out for the retracements with open trades, but you wait for retracements outside the market, enter when the pullback momentum has faded & the market upward trend is resuming.
Also as a trader, never trade the pullbacks, pullbacks are not in the direction of the trend, pullbacks are counter trend, & counter trend is the worst strategy to use to make money - you might catch one trade, but 9 times out of 10 you will be on the wrong side of the trade.
It is best to wait out the retracements & open buy trades after these pullbacks. Remember stock index keep moving up because these indices track the best shares from the world leading economies. Therefore, because people in these top world economies have money to invest and they keep buying the stocks - with the most preferred stocks being these top stock tracked by these indices. This fact that the stocks tracked by these indices are the most sought after stock & most traded & most profitable, meaning that their value is likely to keep going up means that the index that track these stocks are also likely to keep going up and up and maintain this upwards trend.
To increase your odds of making a profit as a trader it's best to trade in the direction of the trend & this is the upwards trend direction. At the same time always wait for a pull back before opening a trade & close your trades when the index level has moved a good number of points in your favor as shown in the example above.
Strategy 2: Diversify the Indices in Your Portfolio
A good second strategy to combine with the one above is to diversify your portfolio and look for these setups among the 14 most popular stock index, this way if a particular index does not have a good trade setup, you can check another one to see if it has a better trade setup and then trade the top 3 or top 4 or top 5 indices that have the best trade setup for the day.
