Resource published Tue, Apr 04, 2017 at 01:53PM UTC edited Tue, Apr 04, 2017 at 01:54PM UTC
How to Trade Indices Edit Title
When choosing a Forex broker, traders must know that they will get more than just Forex currencies quotations. The competition on the Forex retail market is so stiff these days that brokers are fighting for every customer.
To do that, they must stay ahead of the curve. That is, the technological curve, as retail Forex trading is mostly related to technological advances in the industry.
A perfect example is the EURUSD pair or any other currency pair as a matter of fact. A few years ago, the spreads were so big between the bid and ask prices, that trading on the retail side was expensive.
It was so expensive that scalping strategies effectively didn’t exist! The only way to make a profit was to swing trade or to invest in currencies.
We all know by now that most traders are scalpers and Forex brokers realized that too. Now with super-fast execution and cheaper access to the interbank market, brokers can offer competitive trading solutions.
Currency pairs are not enough anymore! To compete in this market, other related products must be offered, like indices, commodities, CFD’s (Contracts for Difference), and more.
Generalities for Trading Indices
These days, any Forex trading platform is an indices trading platform tool. It means that one can trade the Dow Jones and S&P500 in the United States, Dax in Germany, or any other of the major indices in the world.
The reason why indices are offered to be traded on a currencies trading platform is the fact that the two markets are interconnected. Most of the times, the same factors that affect a currency in a specific region in the world, affect the stock indices too.
Currencies are moving based on the interest rate the central bank is setting. The interest rate, on the other hand, is set by the central bank when it is holding its regular meeting.
In the capitalistic world, this is happening every six weeks (United States, Eurozone, Bank of Canada), monthly (Reserve Bank of Australia, Bank of England) or even quarterly (Swiss National Bank). When the central bank is meeting, is interpreting the evolution of the economy and sets the interest rate for the period ahead.
This may result in a change in the communication language, or even in a change in the interest rate for that respective area and currency. Any of the two results in affecting the currency.
A hawkish outcome is bullish for the respective currency and implies the central bank is hawkish on the economy. If interest rates were not hiked yet, chances are that they will be raised soon.
Higher interest rates, on the other hand, are negative for the stock market, and indices will be sold as a reaction. The reason is that people will have the tendency to save in bank accounts rather than looking for a higher yield by buying stocks.
On the other hand, a lower interest rate is bullish for stocks. As a rule of thumb, every time when a central bank lowers the interest rate or starts an easing cycle, stock indices are bought.
Now you can see why it is important to have indices available to trading in a Forex account: to benefit from the moves the central bank is making. Moreover, there are specific correlations that can be used, too.
The most famous one is between the USDJPY and the US indices. It is well known that if the Dow Jones and S&P500 are dropping, the USDJPY will have a hard time rising.
Most of the times, it will fall as well. The other way is true as well: bullish indices will result in higher USDJPY.
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