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Success in Trading Stock Indexes -
Success in trading stock indexes depends upon choice of index, fundamental analysis of the market sector or economy that the index represents and attention to market sentiment. Here is a brief overview of the business of trading stock indexes. Our goal is to help the trader devise a trading system that leads to success in trading stock indexes and helps avoid simply trying to outguess the market.
What the Stock Index Contains
There are a wide variety of stock indexes. There are stock indexes that include stocks from all parts of the world or selected parts of the world, and there are stock indexes that include only stocks from a given nation. Stock indexes such as the Standard and Poor’s 500, the Nikkei 225, the RTSI, the SENSEX, and the FTSE 100, represent large cap companies in the USA, Japan, Russia, India, and the United Kingdom, respectively. There are stock indexes that represent individual sectors of the stock market. For example, The Morgan Stanley Biotech Index represents thirty-six US stocks in the biotech sector while the Wilshire US REIT index represents more than eighty REIT’s or real estate investment trusts. If you are trading the Russell 2000 you are trading an index that represents the bottom two thousand stocks in the Russell 3000 index. These are mid and small cap stocks with market caps of usually no more than a billion and a half dollars.
What Drives the Constituents of the Stock Index
To a degree all stock indexes are driven by the economy. However, large indexes such as the Standard and Poor’s 500, the Nikkei 225, the RTSI, the SENSEX, and the FTSE 100 typically rise as fall with the national or global economy. If you are trading the SPY, the SPDR exchange traded fund that tracks the Standard and Poor’s 500 you will expect to see a rise in the index when news from Europe implies a resolution of the debt dilemma or when US employment figures are improving. You will expect to see a fall in the S&P 500 and the SPY when trade figures for the USA show increasing red ink or when congress is unable, again, to deal with an extension of the US debt ceiling. Many traders who follow events in Europe, for example, find as much success in trading stock indexes as in trading the Euro.
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