Index futures trading is broadly defined as any futures contract bought on a financial index or stock. Specifically, it means the trade is made within a sector of the index itself, as opposed to the entire list of companies within the index. This gives the investor a diversified approach within a targeted market. However, this definition says little about the fundamental nuts and bolts of making successful trades. To realize a steady profit, the basics should first be mastered, with a full realization of the risks involved.
Investors can trade index options on any of several major indexes. These include the S&P 500, Russell 2000, Russell 1000, S&P 100 and others. A futures contract is written based on which direction the individual believes the value will go, but one can also use this investment as a hedge against losses in other, similar sectors.
While investing with this method can be lucrative, the individual is not purchasing real assets. Although there are no underlying assets with index futures trading, a substantial quantity of securities can be controlled for a fraction of the value.
Timing plays a large role in index trade strategies. Two methods are common. The first is to research historical data and base trades on frequently repeated patterns. This method is lucrative when investors can recognize repeated up and down cycles and time them correctly.
The second strategy is based on identifying and acting on seasonal trends. Many factors can affect the direction an index will take, including global and local political activity and/or unrest, and of course local and global economic factors. However, recurring seasonal factors refers to predictable changes such as the increased cost of heating oil in the winter, or a higher demand for certain commodities at different times of the year.
Before risking real assets, it is important to understand the process completely. Take advantage of brokerage “dummy” accounts to get a feel for the markets without the risk. The more time an investor takes to do research on index futures trading, the more likely they will be successful at it.
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