Trade Stock Indices On High Leverage Up to 500: 1

Trade Long or Short
The ability to trade long (rising markets) or short (falling markets) is a luxury not always present on stock markets or futures. Equity brokers can limit or halt the amount of shares they lend to bearish speculators and, if a futures market hits limit up or down, traders cannot enter or exit a position on that market. CFDs do not suffer from this issue – traders are free to trade long or short CFDs of their choice. This makes indices very appealing to swing traders, intraday traders and position traders regardless of underlying market conditions.

Trade on Margin
With leverage of up to 100:1 offered by ThreeTrader, margin requirements for our global indices remain low. This means the amount required to deposit to trade a cash CFD is relatively low compared with the value of its underlying market.

Trade Risk Sentiment
Indices are an excellent barometer of risk appetite, which means that equities tend to rise when investors are feeling confident about the future and want to take more risk. Conversely, indices tend to fall during bouts of risk-off. Whilst other factors are also at play for market direction, when something large and unexpected hits trader’s screens across the globe, correlations between risk assets become strong and they generally rise or fall in tandem.

This provides traders with ample of opportunity to trade both long and short as the pendulum swings between the two states of risk-on and risk-off.

Examples of risk-off themes could include, but not limited to:

• Geopolitical tensions (eg. War in middle east, trade wars)
• Surprise election or referendum results (eg. Trump or Brexit in 2016)
• Viral outbreaks (eg. Covid-19)
• Government defaults (eg. Argentina bond defaults, lower credit ratings)
• A break of a currency peg (eg. EUR/CHF in 2015)

During periods of risk-off, it is not unusual to see global indices fall in tandem whilst safe-haven assets like gold, the Japanese yen and Swiss franc rise. Conversely, these moves can quickly reverse once the tensions reside and markets revert to ‘risk-on’ mode, seeing global indices rise again.

Trade a Broader Directional View on Equities
Indices allows traders to take a positional view on the broader market and not focus on individual stocks. For example, they may be bullish on the US economy so choose to enter long positions on the S&P500 (US500). Or they may be bearish on Japanese equities so decide to short (sell) the Nikkei 25 (N225).

Trade the Outperformers / Pairs Trading
Whilst some traders prefer to exclusively trade one or two indices, another approach is to select indices they believe will outperform (or show stronger levels of momentum) in a certain country or sector. For example, a trader may be bullish on US equities but believe technology stocks will outperform, so they deice to trade the Nasdaq 100 (USTEC) over the S&P500.

Taking this a step further, indices are an excellent vehicle for pairs trading (spread trading). This is where a trader will go long one index and short another. In doing so, the trader effectively hedges out ‘market risk’, which is the risk that markets fall in tandem following an exogenous event. By being long one index and short another, if all indices are to fall it can limit the downside of the investment. However, the opposite is also true; if all shares rise it can limit upside potential. This is why it is important for the trader to correctly identify the outperformer, as the stronger index is presumed to rise faster than other indices, and not fall as far if all markets fall in tandem, offsetting downside risk in the process.

Dilute the Risk of Stock-Surprises
Because indices are made up of a basket of stocks, earnings surprises from individual companies (whether positive or negative) make less of an impact on the underlying index. This makes excessive gaps less likely whilst the markets are closed, allowing traders to better manage their risk.  Of course, if we find the multiple companies are missing or exceeding their earnings expectations, it will have a greater impact on the index. Yet trading the individual index is easier to manage under this scenario.

For example, the S&P/ASX200 (AUS200) is enjoying a bullish rally, yet one of Australia’s ‘big four’ banks, Westpac, sells off sharply due to an unexpected earnings surprise or lawsuit. Whilst it could still have a negative impact on the index, its impact on the ASX200 should be relatively muted.

As all stocks and indices are weighted slightly differently, it can help to at least have a basic awareness of the makeup of the index and keep an eye on earnings releases to better time entry of trades.

Hedge an Open Position or a Portfolio
To hedge an open position, a trader would open a position in the opposite direction to their initial trade. There are a few reasons to why this may want to be done, but the most common reasons are to lock in a profit or reduce risk ahead of a volatile event. In some ways it is comparable to an insurance premium.

For example, a trader holds a profitable long position on the Nikkei 225 (N225) on a Friday afternoon. They remain bullish on the trade but want to lock in profit over the weekend to protect themselves from an adverse weekend gap. They decide to open an equal weighted short position of the Nikkei 225 to hold over the weekend.

• If the market opens higher on Monday: The hedged position (short trade) would be negative, yet the original profitable position would offset the short position as it has moved further into profit.
• If the market opens lower on the Monday: The portable position (long trade) would have given back at least some of the profit, yet this loss would be offset by the hedged position (short) which would now be showing a profit.
• If the market opens around the same level: The hedged position (short trade) would be around breakeven and the profitable position (long trade) would remain in profit.

If an equity investor holds a long-only portfolio of stocks, they could hedge out some market risk by shorting a relevant index. For example, if they hold of group of US technology stocks but were concerned of an upcoming risk event such as an election or earnings release, they could sell short the Nasdaq 100 Index (USTEC).

Indices are Highly liquid instruments
As trading volume for indices are high they’re considered to be highly liquid instruments, meaning they’re relatively easy to buy and sell. An example of an illiquid instrument is a house as it takes a long time to enter and exit the trade.

As technical analysis generally performs better on liquid instruments, this is good news for chart enthusiasts and index traders as indices tend to respect key levels more so than low liquidity stocks.