INDEX TRADING

If you are new to investing, then you may have never heard the term Index Trading. With the wide array of tools, techniques, and investment options currently available on the market, making sense of all the available information can feel overwhelming, especially when you don’t know where to start.

Index Trading is trading that is based on the trend of the market. While there is a wide array of Index Trading formulas available based on the market the investor is interested in, one of the more widely known is the Trading Index or Arms Index. This index is classified as an indicator that is used by the market to determine whether the market is on a bullish or bearish trend. It is determined by dividing the number of advancing issues, or stocks available for sale, by the number of declining issues, or stocks that are not available for sale, and then dividing that by the total up volume over the total down volume. While this may sound like a lot of gibberish, most investors will only be concerned with the resulting number, and not how that number was achieved.

Upon calculation, if this equation results in a value that is less than 1, then the market is considered to be bullish or on an upward trend. This insinuates that prices will be on the rise. Investors will, of course, prefer this type of market over many others because profits tend to usually be better when a stock is on the rise. This is great for those investors who were able to buy low while counting their profits as the stock’s price rises.

There will also be times when the equation will produce a value that is greater than 1, and that market is considered to be bearish or on a downward trend, meaning prices will start to fall. Investors tend to fear this type of market, because it can end up being quite costly if their stocks are not sold off at their highest point. The longer one holds onto a stock in a bear market the bigger the risk they face, especially if they follow the mantra that the price will go back up.

The Trading Index or Arms Index will most likely be of the most benefit to the active investor who is constantly checking the status of their stocks and the status of the market multiple times in a normal trading day. The occasional trader can benefit from this number as well, but it will depend on how frequently they check the status of their stocks. Those that check their status on a weekly basis will be more likely to recognise an impending change than those who only check once or twice a year. The numbers can only help you if you know how to use them.

This is only the start of what Index Trading has to offer. If you are looking to learn more, there is a wide range of books and courses available that can teach you all the ins and outs of Index Trading for more detailed areas of investing. Take the time to research, learn and watch the market carefully, and in no time you too will be profiting like the pros.