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Module 10: Module Re-cap and Quiz 

Module 10: Module Re-cap and Quiz 
Module 10: Module Re-cap and Quiz 
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Module 10: Module Re-cap and Quiz 

Module 10: Module Re-cap and Quiz 

10.1 Re-cap of Indices Beginner Course 

Module 1: Introduction to Indices Trading 

  • Indices are used as benchmarks for stock markets. They are a hypothetical portfolio of various investment holdings, each organised according to predefined rules. 
  • Indices may track regional stocks, stocks by market capitalisation, or company stocks across a sector, among others. 
  • Because stock market indices track the performance of a selected segment of stocks, they are useful in helping to understand the conditions of a market. This is especially true for the major stock market indices that track the stock markets of various countries. 
  • Some of the most popular stock market indices are S&P 500 (US), Nasdaq (US), FTSE 100 (UK), Hangseng Index (HK), DAX40 (Germany) and the ASX 200 (AU). Each of these may follow their own rules for choosing constituent stocks, but they all track the top performing companies listed on the respective stock exchanges.  
  • Most stock exchanges around the world do not open for trading on the weekend and instead operate a consistent weekday trading routine. However, stock market trading hours can differ depending on the culture and religious practice of a region.  
  • The three main ways of weighting stock market indices – in order of popularity – are market-capitalisation weighted, price weighted, and equal weighted.  
  • Market-capitalisation weighted indices rank constituent stocks according to the size of the company’s market capitalisation, which is derived by multiplying the share price by number of shares.  
  • Price-weighted indices rank constituent stocks according to share price. Such indices are useful for understanding the average share price of the market.  
  • Equal-weighted indices do not rank their constituent stocks – instead a simple average is used to calculate the value of the index.  
  • There is no way to invest directly in an index, as it is simply a benchmark. However, investors and traders may trade indices using either CFDs or ETFs. 
  • Index CFDs are financial derivatives that allow speculation of the price movement of an underlying index. No actual ownership of any shares are involved, and both long and short trades may be made.  
  • Index ETFs are investment funds set up to track the performance of an underlying index. You can purchase and hold shares of an index ETF as an investment, and make capital gains when the index rises. If the index falls, selling your holdings will incur a loss.  

Module 2: Types of Indices and Their Characteristics 

  • There are many different indices available that measure all manner of markets, regions, and segments. However, indices share some core characteristics, such as they cannot be directly traded or owned, often composed of the most influential securities or assets, and can produce different readings depending on how they are weighted.  
  • Sectoral indices measure the performance of a particular market sector, such as energy, consumer goods, health care or aerospace. They are useful in gauging the performance of a stock compared to the rest of its peers.  
  • National indices compile the most influential stocks listed on a country’s main stock exchange. They are helpful for quickly gauging the state of the stock market of the underlying country.  
  • Indices can also be organised along market capitalisation, which is a measure of the size of a company derived by multiplying its share price by the number of outstanding stocks.  
  • Large-cap indices track companies with market caps of USD 10 billion or more. These are blue-chip companies, global leaders and the like. 
  • Mid-cap indices track companies with market caps ranging from USD 2 to 10 billion. These may be up-and-coming companies, or conversely long-established companies that have exhausted their growth runway.  
  • Small-cap indices track companies with market cap from USD 250 million to 2 billion. These are usually startups, SMEs, young trailblazing. 
  • International indices cut across segments and borders, compiling the most influential stocks from companies around the world. They are important indicators of market trends, investor sentiment, and broader economic conditions, allowing investors to benchmark their own portfolios, and form the basis for investment managers to launch new funds. 
  • ETF tracking indices are funds set up to mimic the performance of a reference index. They offer a way for investors to “trade: in the underlying index, by purchasing and selling units of the fund.  
  • Indices CFDs are an advanced trading strategy that allow speculation of a reference index. No fund units or stocks are traded, instead the difference in the index’s price between the opening and the closing of the contract is settled directly into your account.  

Module 3: Preparing Your Arsenal 

  • Live and demo accounts can both be useful for traders of all levels, and even advanced traders can benefit by using a demo account to sharpen their trades.  
  • The most popular platforms for trading are MT4 and MT5. The former is focused on forex trading, while the latter offers a wider range of assets.  
  • Besides MT4 and MT5, Vantage also offers other trading platforms that may be useful for certain traders. WebTrader offers cloud-based trading via any web browser, ProTrader provides additional charting tools and technical indicators, while Vantage app facilitates seamless trading over mobile devices. 

Module 4: Essentials of Chart Reading 

  • Index charts – or more properly, price action charts – are an essential tool for traders to learn, as they provide basic but important information such as price trends and reversal points that may be potential trading opportunities.  
  • Three common index charts are line charts, bar charts and candlestick charts. Of the three, candlesticks provide more information than line charts while being easier to read than bar charts.  
  • A candlestick chart is made up of individual candles, each representing a trading period (such as an hour, a day or a week, etc).  
  • Candles are made up of a rectangle (the real body) and wicks or shadows on the top and bottom.  
  • The length of the candle’s body tells us the difference in price between opening and closing. When the closing price is lower than the opening price, the candle is a bearish one and is traditionally coloured red. When the closing price is higher than the opening price, the candle is a bullish one, and is traditionally coloured green.  
  • The length of a candle’s wicks tells us the difference between the highest/lowest price and what the price ultimately closed at. This can be taken as a measurement of market sentiment.  
  • Long top wicks may be read as a bearish signal, while long bottom wicks may be read as a bullish signal. Short top wicks may be a bullish signal, while a short bottom wick may be a bearish signal. 
  • Candlesticks reflect the trading activity of the period, and can thus appear differently from day to day. The appearance of certain candlestick shapes and patterns can indicate bullish or bearish trends.  
  • Bullish candlestick patterns include the Hammer, Inverse Hammer, Bullish Engulfing, Three White Soldiers and Bullish Rising Three 
  • Bearish candlestick patterns include the Hanging Man, Shooting Star, Bearish Engulfing, Evening Star, and Bearish Falling Three 
  • Candlestick patterns do not guarantee the onset of a bullish or bearish trend. Instead, they should be taken as descriptions of price tendencies.  
  • Trading volume is a crucial indicator of an index’s momentum and market activity, reflecting the number of units traded.  
  • High trading volumes suggest strong investor interest and market liquidity, which, combined with price trends and technical analysis, can offer insights into market sentiment and help predict future price movements. 

Module 5: Basics of Fundamental Analysis in Indices Trading 

  • When trading indices, fundamental analysis can offer investors findings that may be useful for arriving at informed decisions. It is focused on understanding the various macroeconomic factors that impact an index.  
  • Market indices are sensitive to economic conditions. The economic indicators that affect indices include GDP, central bank interest rates, inflation and unemployment rates. 
  • Sector performance can also influence indices, although the extent of the impact depends on how the index is weighted. Generally, market-cap weighted and price-weighted indices are more sensitive to the sector performance of their most important constituents. Equal-weighted indices are less affected than the other two types of indices.  
  • Additionally, indices are also impacted by global events and market sentiment. Investors should pay attention to news and developments with the potential to disrupt stock markets. As well, be vigilant about verifying news sources, so as not to be misled by fake news.  

Module 6: Basics of Technical Analysis 

  • Technical analysis is a framework for traders to study the price action of an index. Charting tools and technical indicators are commonly involved, and a trader who makes trading decisions mainly via technical analysis is known as a technical trader. 
  • Using historical price and trading volume data, technical analysis allows a trader to discern the possibility of future price trends and events. 
  • Technical analysis is often criticised for being too subjective; this is thought to arise from differences in how charting tools are employed, as well as differences in individual interpretations. 
  • Technical analysis is most commonly done on a candlestick chart, where traders can study individual candlestick characteristics and candlestick patterns to identify potential price reversals and incoming price trends.  
  • Trendlines can be plotted on a price chart to better visualise price trends – uptrends, downtrends and sideways trends. This can help minimise risk. 
  • Trendlines are also used to demarcate levels of support and resistance. Support levels represent a price floor, whereas resistance levels represent a price ceiling. 
  • Depending on the state of the market, support and resistance levels may be broken. When price rises above resistance levels during a bullish trend, the level turns into a new support level. When price falls below support levels during bearish trend, the level turns into a new resistance level. 
  • The Relative Strength index is widely used to signal when the market is overbought or oversold. It is displayed as a number from 0 (oversold) to 100 (overbought). Typically, traders pay attention to levels 30 and 70 on the RSI. 
  • A moving average filters out noise on the price chart by creating a constantly updated average price. It is a lagging indicator that relies on past prices to identify the trend direction of an index, or to find levels of support or resistance. 
  • A pair of moving averages can also be used to discern price trends. For instance, when a 50-day moving average (shorter lag) crosses above a 200-day moving average (longer lag), a bullish trend is indicated. When it crosses under instead, a bearish trend is indicated.  
  • A simple moving average is a simple arithmetic average of prices over a timespan. An exponential moving average accords more weight to recent prices over older ones in the time range.  
  • While fundamental analysis and technical analysis are two very distinct approaches to trading analysis, traders can benefit from both methods. Learning both will provide a trader with a richer foundation to draw upon. 

Module 7: Basics of Risk Management  

  • Risk management is an essential skill that all traders must master. It involves scanning for factors that may negatively affect trades and taking steps to minimise their impact. 
  • The crux is to minimise risk while maximising the potential for returns. 
  • Proper risk management is what sets a professional trader apart from someone who simply gambles on the stock market.  
  • Liquidity risk arises when a stock has low trading volume. This can cause high spreads, or even prevent trades from being executed altogether. 
  • Broker risk depends on the technology, capabilities, policies, and safety measures of the brokerage you choose. 
  • Market risk refers to the volatility of the market and can be impacted by economic or political issues. 
  • Traders should also be aware of country and social risks that may be at play in the countries whose currencies they are trading. 
  • To manage risk, proper use of leverage is crucial. Be aware that leverage multiples your potential loss, which may outstrip your account value. 
  • An important risk management strategy involves selecting the right allocation for trades, ensuring that the capital risked on each trade does not surpass a specific percentage of your total capital before leverage. This percentage can vary based on your individual risk tolerance. 
  • Learn how to set stop losses to reduce potential losses and improve your trading outcomes. 
  • Taking profit at appropriate levels can give you better results over the long run versus attempting to ride out every trade. 
  • Understanding risk-reward ratio is crucial to your success. Risk-reward ratio varies from trade to trade, and you can calculate your own ratio for each trade. 
  • A trading plan is an integral tool for risk management. It serves as a record of your trading outcomes, helps you to learn from past mistakes, and may help detect unconscious biases or negative beliefs that are hindering your success.  

Module 8: Basic Indices Trading Strategies 

  • A trading strategy is a set of actions made when trading indices, based on predefined rules, and performed with a target outcome in mind.  
  • The point of a trading strategy is to provide a structured framework for your trading decisions. 
  • Trading strategies can be simple or complex, and consider factors such as objectives, time horizon, tools available, risk tolerance and experience level. 
  • A sector rotation trading strategy attempts to profit from the cyclical nature of certain sectors. A trader would buy into a sector that is slated for an upswing according to its business cycle, and sell at the peak of the cycle.  
  • Sector rotation strategy can allow a trader to avoid larger market downturns. It can be a fairly predictable strategy, with lesser uncertainty. However, sector rotation strategy can break down when unexpected events disrupt natural business cycles.  
  • A trend trading strategy focuses on identifying and trading emerging trends on a price chart. It is based on the idea that what has happened in the past provides clues as to what could happen in the future. 
  • Trend trading can help to identify trading opportunities and minimise risk. As analysing a market trend can involve several data points, investors using trend trading can establish a deep understanding of the market.  
  • It’s important to bear in mind that historical data can only offer a limited insight into future events, and allowances should be made for unexpected occurrences.  
  • Position trading involves holding a position over a relatively long period of time, on the expectation that the index will appreciate in value.  
  • The advantages of position trading is that it is a relatively simple strategy, and requires a lesser number of trades to be made. The disadvantages are longer duration of trade, and potential opportunity cost of tying up capital. There is also greater risk of getting caught in a trend reversal since position traders often ignore minor fluctuations. 
  • In breakout trading strategy, a trader looks for a breakout in an index, and places an appropriate trade in response. Breakouts are when an index’s price moves above or below a strong line of resistance or support, accompanied by a clear increase in volume.  
  • Breakout trading is highly versatile, applicable to long or short timeframes. However, success requires the ability to find an index with established resistance and support, and the patience to watch for confirmation so as to discern between true breakouts and false ones (fakeouts). 
  • In a swing trading strategy, traders attempt to capture profit from the price swings along a larger trend. Swing trades tend to be short-term in nature, and relies upon  identifying points where an index is expected to make a move up or down, and then opening a respective long or short trade. 
  • Swing trading can be applied to indices that are volatile or tame. Overall trends are ignored in favour of smaller price swings, and successfully capturing the bulk of swings can let a trader realise significant returns no matter where the index heads. However, because of this, swing traders can often miss out on opportunities found in larger market trends.   
  • Backtesting is the testing and refinement of trading strategies using historical data. If a strategy produces good results in past markets, it is also likely to perform well in current or future market conditions.  
  • Backtesting is not to be confused with paper trading. The former uses historical data, while the latter uses live market data in real time.  
  • Both backtesting and paper trading allow you to make trades without committing any capital.  

Module 9: Trading Psychology  

  • The largest influence behind our trading decisions is our trading psychology. This influence can sometimes be very subtle, which can make it difficult to spot. 
  • Trading psychology may be thought of as our mental and emotional state while trading. Personality, beliefs, and past experience may also play a part. 
  • Traders who master their trading psychology are less prone to emotionally driven decisions, and thus have a higher potential to succeed. 
  • For most traders, the main driving forces between trading psychology is greed and fear, and the interplay between these two emotions. 
  • Feeling fearful or greedy is natural, but problems can arise when we give in to their influence and make irrational trading decisions. 
  • Fear can cause us to close positions too early, or even stop us from entering potentially profitable trades, reducing our overall returns. 
  • Greed can cause us to lose profits by keeping positions open for far too long, or risk losses on positions that are improperly sized. 
  • The three ways traders can manage trading psychology are sticking to their trading plan; conducting research and gathering knowledge; and staying flexible and constantly honing their skills 

Quiz

Take this short quiz and see if you have mastered this course!

Module 10: Module Re-cap and Quiz