Why do people trade indices?

[hb7of9]

As per the title, why do people trade indices, what is the logic behind it?

Is it because they are less volatile than stocks?
Is there any edge associated with trading indices? - other than the liquidity.:?:
Is it because there is correlation between indices, be it domestic or international?

 

[BeginnerJoe]

Because there is index futures. A continuous market is theoretically safer than one that closes. Also fewer entities have the capacity to manipulate indicies than individual stocks.

 

[hb7of9]

Because there is index futures. A continuous market is theoretically safer than one that closes. Also fewer entities have the capacity to manipulate indicies than individual stocks.

Thanks for the reply BeginnerJoe,

Apart from futures, continuity and manipulation are there any other factors that make trading indices, easier, or mayhap increases the odds?

 

[timsk]

. . . are there any other factors that make trading indices, easier, or mayhap increases the odds?

Hi hb7of9,
In a word - no. If the odds of success were greater trading indices than they are trading other markets, and/or they were easier to trade - then everyone would trade them. The word 'easier' is extremely subjective. Sure, each market has it's own characteristics to which traders can generally agree are good or bad, but these tend to cancel one another out.

The bottom line is that there is no inherent edge in trading one market rather than another. But, there will be a market - or possibly markets plural - that suit you and your trading style better than others.
Tim.

 

[BeginnerJoe]

No, there's nothing out there that doesn't involve work. But the casino roulette should be comparitively easier if their odds are genuinely around 49% for red-black. The odds on all conventional market bets are lower than this.

 

[malaguti]

Thanks for the reply BeginnerJoe,

Apart from futures, continuity and manipulation are there any other factors that make trading indices, easier, or mayhap increases the odds?

Another reason could be that they trend far better than individual stocks. You will likely and should find stocks that resemble the indices, but given that the index is a collection that noise is almost filtered out. Just take a look at the S&P for example. since 2009 the classic definition of a trend (Higher Highs/Higher lows) is just so clear to see.
The index will also have certain characteristics, different from an individual stocks. Less spikes etc, and where troughs and peaks are more pronounced, and show more tendency to cyclical behaviour.
..these are just my findings at least

 

[hb7of9]

Another reason could be that they trend far better than individual stocks. You will likely and should find stocks that resemble the indices, but given that the index is a collection that noise is almost filtered out. Just take a look at the S&P for example. since 2009 the classic definition of a trend (Higher Highs/Higher lows) is just so clear to see.
The index will also have certain characteristics, different from an individual stocks. Less spikes etc, and where troughs and peaks are more pronounced, and show more tendency to cyclical behaviour.
..these are just my findings at least

:cheesy:

Thank you for this, I appreciated your input - all valid points.

Regarding the cyclical behavior you mentioned, what were your findings?
Are there months, that are indices, tend to perform better or worse? If so why?

 

[malaguti]

:cheesy:

Thank you for this, I appreciated your input - all valid points.

Regarding the cyclical behavior you mentioned, what were your findings?
Are there months, that are indices, tend to perform better or worse? If so why?

No, they dont perform better or worse, its the timing of when you might expect to find a trough or peak. Hurst claimed that there were typical cycle lengths that are 5 days, 10, 20, 40 and 80 days long and then multiple of these. Now, although not necessarily equal every cycle, that would be just too easy, there is some correlation. Look into the 100 day cycle that existed for quite some time in the past..which would be the equivalent of the hurst 80 day cycle as an example.
Thats what I mean by the cyclical nature of an index vs an individual stock.

 

[hb7of9]

No, they dont perform better or worse, its the timing of when you might expect to find a trough or peak. Hurst claimed that there were typical cycle lengths that are 5 days, 10, 20, 40 and 80 days long and then multiple of these. Now, although not necessarily equal every cycle, that would be just too easy, there is some correlation. Look into the 100 day cycle that existed for quite some time in the past..which would be the equivalent of the hurst 80 day cycle as an example.
Thats what I mean by the cyclical nature of an index vs an individual stock.

I have looked at the 80 cycle and found it very interesting, I have yet to wrap my mind around the implications of the result, need some time to mull it over and churn out some stats.

I have come across the idea that investing at certain times of the year, meaning months are better than others, in several books. Also seen this researched in a thesis or two and some interesting statistical studies done on the subject.

For example, investing in Nov, December to Jan, because people tend to spend during these months.

I will put some numbers together, and drop a link to illustrate what I mean.

 

[BeginnerJoe]

Since a lot of people don't trade indicies, the question of why people don't trade indices would be a more important for a beginner.

Both the best size and margin requirements are higher for indices in absolute terms. This would be a perfect reason why a beginner shouldn't trade indices. You'd go bust sooner, and when you do, you end up losing more money than trading something else that hasn't got such a large minimum bet.

 

[hb7of9]

Since a lot of people don't trade indicies, the question of why people don't trade indices would be a more important for a beginner.

Both the best size and margin requirements are higher for indices in absolute terms. This would be a perfect reason why a beginner shouldn't trade indices. You'd go bust sooner, and when you do, you end up losing more money than trading something else that hasn't got such a large minimum bet.

Sound advice, and a pertinent question, thanks, I am new to the forum, but have a little experience, first investment in 1995, this is what I love doing.

Anyhow, this is what I meant with the numbers...

this is the monthly SP,
Win %, is just the W/L ratio.
Sum %, is just total gain or that month.

The months I found interesting are,
Nov through to Jan
April
and September

Draw your own conclusions,

 

[malaguti]

I have looked at the 80 cycle and found it very interesting, I have yet to wrap my mind around the implications of the result, need some time to mull it over and churn out some stats.

I have come across the idea that investing at certain times of the year, meaning months are better than others, in several books. Also seen this researched in a thesis or two and some interesting statistical studies done on the subject.

For example, investing in Nov, December to Jan, because people tend to spend during these months.

I will put some numbers together, and drop a link to illustrate what I mean.

Indeed, and these come as no surprise that there is a saying, sell in May go away. Of course not every year, but its cyclical nonetheless

 

[Trader333]

..Since a lot of people don't trade indicies, the question of why people don't trade indices would be a more important for a beginner.

Isn't the S&P one of the most heavily traded index futures of all markets traded by professionals ?

 

[BeginnerJoe]

Isn't the S&P one of the most heavily traded index futures of all markets traded by professionals ?

I don't doubt it. But it's no place for a beginner. Since the OP is not a beginner, I suppose it can work for him. Indices are good for people who wants to go large, hence your mention of professionals.

For people using non-professional sizes, the money works more efficiently in other markets, or even on cheaper derivatives of indices. Indices are way above my league, so I am not inclined to even look at their derivatives.

Just because professionals drive F1 cars, doesn't mean you should. Because if you do, you'd crash on the first corner you encounter.

Different markets are more efficient for traders of different statures. Finding that efficiency is part of the game.

 

[Purple Brain]

Isn't the S&P one of the most heavily traded index futures of all markets traded by professionals ?

I thinks that's the point trader333. It, and all the other major indices, I understand feature highly in the portfolios of funds and FoF and hedgies attempting to match the performance of the indices and also by using them in a myriad of complex ways along with other derivatives to provide whatever levels of risk, beta, delta, gamma etc they are seeking to obtain.

I've never studied them from a technical perspective, other than briefly recently on the DAX30 thread, but get a sense they all suffer from killer volatility at times and less favourable leverage than I can get on FX. I also am told slippage and other broker gaming techniques are far more common than with FX. Be delighted to hear none of the above is true as OANDA to provide facilities to trade them and the DAX looked well enough behaved on the few days I spent time looking at it.

 

[hb7of9]

I was wondering if...

1. April that usually does well, also performs well in other markets.
2. Nov to Jan, which usually do well, also applies to other markets.
3. Sept, which usually drops, also applies to other markets.

 

[lucas_king]

As per the title, why do people trade indices, what is the logic behind it?

Is it because they are less volatile than stocks?
Is there any edge associated with trading indices? - other than the liquidity.:?:
Is it because there is correlation between indices, be it domestic or international?

They are certainly not less volatile. In fact, in my experience people trade them because they are more volatile. Also, it removes the noise and risk associated with individual stocks, and it’s a convenient way of diversifying your holdings.

One word of warning – it’s possible to over-leverage with indices, so don’t get greedy and stay in control. If you do, it’s a great tool.

 

[hb7of9]

They are certainly not less volatile. In fact, in my experience people trade them because they are more volatile. Also, it removes the noise and risk associated with individual stocks, and it’s a convenient way of diversifying your holdings.

One word of warning – it’s possible to over-leverage with indices, so don’t get greedy and stay in control. If you do, it’s a great tool.

ty, I appreciate your input

 

[malaguti]

I was wondering if...

1. April that usually does well, also performs well in other markets.
2. Nov to Jan, which usually do well, also applies to other markets.
3. Sept, which usually drops, also applies to other markets.

I would be very surprised if they didn't share similarities like this..they are correlated afterall.

 

[WR1]

a 90 degree triangle
just add to the bottom of a chart and follow it up and down
but best used in the QE yrs