Index Fund Trading Using Technical Analysis and Swing Trading Strategies
Index Fund Trading can be one of the most profitable…or most costly exercises you will ever do.
While trading a basket of Stocks has it's advantages, such as removing the risk of any single company you own Stock in going bust and taking all of your money with it, Indexes tend to be highly volatile, especially the smaller ones.
Using technical analysis and swing trading strategies for your index fund trading can vastly improve your results and profits if you know how to analyze Stock trends and patterns.
The S&P 500 is probably one of the Worlds best known indexes, and it has a long history of strong trends that have made and lost traders fortunes over the years.
By trading a managed fund that tracks the Index, we can participate in the movements of the market.
The easiest way to do this is to simply buy a managed fund like the Vanguard 500 Index fund. This works fine when the trend is up, but what about when the trend is heading in the other direction?
There are several funds that trade inversely to this index. One of these can be used to trade the downside when prices are falling, as they did for a long period of time as the market came off the 2000 top.
The problem with these funds is that you usually have no leverage. This is why many traders move on to Index Fund Trading through derivatives as an alternative to simply buying a Mutual fund.
If you and your adviser believe that some type if derivative is appropriate for you, then you will gain tremendous leverage to movements in the underlying market.
Of course, if you have no idea how to trade, this leverage is a two edged sword.
Index Fund Trading can be very profitable, but you have to do it right.
This is why learning how to trade profitably, using technical analysis, is far more important than the vehicle or fund you use.
Many investors believe that technical analysis is of no use to them. They consider it to be far too unreliable.
It can be for an inexperienced user, but a basic understanding of technical analysis principles would have saved many traders and investors many thousands or millions of dollars during the recent bear market.
The great trader WD Gann said it doesn't take very long to make a lot of money trading Commodities (or Stocks for that matter), but it does take a long time to get ready to make a profit.
Getting ready involves study and a little bit of work – unfortunately, there is no other way if you want to make significant profits trading Indexes or Stocks.
So, lets have a look at an index and how we would trade it.
I have used the S&P 500 in this example, as it is a big liquid market with lots of participants, however this trading method applies equally to any other Index or Stock.
Please Click Here to go to the chart for this article. Once you have it printed out or studied it and have it open in a new window, please come back here and we will get underway.
Index Fund trading for investors is best carried out using weekly charts and swing trading strategies as these tend to show strong, consistent trends, minimizing switching fees and/or Brokerage expenses.
For an in depth discussion of swing trading strategies, Click Here.
By placing two simple moving averages on this weekly chart, Index fund traders are given clear buy and sell signals for their entries and exits into the S&P 500 Index Fund of their choice, or some other form of leveraged exposure to the Index.
After a short period of indecision at the start of this chart, the short term moving average crossed down through the longer term one, indicating a switch out of any S&P Index funds was warranted, and for more aggressive investors, possibly a move into one of the many funds that trades inversely to this Index – I.E. a fund that makes a profit when the Index falls.
A two bar reaction against the new downtrend quickly failed and a new low in price was made within 2 weeks, forming a lower swing high on the weekly chart – this is a very good indication that the fast move down will continue – 7 weeks down, followed by 2 weeks up, then quickly to a new low tells us that the trend is now down.
Just above the swing high of the two bar reaction is also a great place to place a stop loss order in case we are wrong and the market starts to rally.
Note that nearly all the weekly closes were below the short term moving average during this period – this is also a sign that a strong, fast move down is taking place.
The Index traded lower for 9 weeks, baring 1 week when it traded slightly above the previous weeks high, giving another lower weekly swing high, ending in a panic selloff on heavy volume.
This small 1 week reaction is a sign that the sellers are in complete control, and this pattern often leads to a panic in the market just like what happened on this occasion. If a market can only rally 1 week, it is in a very weak technical position.
This high volume selloff ending in a panic was followed by a sharp 4 week rally, then a move to a slightly lower low that quickly reversed.
It is interesting to note that the price of the low was 775 points – exactly half the 1550 high made by this Index at the top of the Bull market – 50% is a powerful support level, according to WD Gann, and many traders were watching this price to see how the market reacted.
In all this time, our longer term moving average was trending lower, telling us that it was not yet time to buy this Index. Note however that at 4 weeks, the next rally was the longest in time for several months – a sign that the downtrend may be tiring.
The Index rallied again, and the shorter term moving average did in fact cross over the longer term one, however the longer term moving average was still falling – no entry was signalled here.
This rally at 8 weeks was twice as long as the previous one, indicating that there were many buyers in the market.
The Index then sold off again, however it took 14 weeks to go down to near the same level as the previous low, indicating the buyers were indeed putting up a fight – just take a look at the difference in trend angle from the first panic selloff to the trend down into the March low – this is a sign that the buyers may be finally able to take control and the sellers are just about worn out.
Finally, after the March low, the longer term moving average changed direction and started to rally – then the shorter term moving average crossed up through it, giving us a buy signal at the end of April.
An entry here would have provided a very profitable outcome, giving investors the majority of the recent rise in this index while preserving capital during the preceding downtrend or Bear Market.
Knowing what you are doing is a very important factor you will require to trade Indexes successfully, or to trade anything else for that matter, and the other articles on this site are designed to show you how you can profitably trade just about any market.
You must possess the skills of profitable trading before entering the market if you are going to create wealth. This is especially true when the concept of leverage is introduced.
By studying the stories and articles available here free at our Stock Trading Review website, you will be in a position to trade profitably, because you will know, with a high degree of certainty, the position of the market, what the current trend is and how to trade it.
The trading strategies in the articles apply equally to both Stocks and Indexes, and will give you a good grounding in how to trade trending markets.
By understanding how markets trend, you will be in a position to enter and exit trades with a high probability of success in any market or Stock you choose.
Some of the common mistakes and attitudes that uneducated traders and investors make are:
- Not knowing where to start in trading or investing – this can be disastrous.
- Holding losing stocks, hoping they will go back up so they can get out without a loss – some will never recover.
- Buying on rumour, tips or gut feel…always a great way to the poor house.
- Continually trying to land a ‘home run' to make back their previous loses.
- Selling stocks early as they start to rise – of course YOU won't do this, due to your understanding of trends, will you?
- A feeling that the market is against you. The market has no memory, it doesn't know or care about you, it just ‘is'.
- Buying expensive software programs that don't work – these just make the vendors rich and can be counter productive.
All too often, people jump into trading head first without a thorough understanding of exactly how they are going to approach the market. The result is usually nothing short of disastrous.
A successful trader treats trading as a business. The first step in the process of becoming a profitable trader is to construct a business plan, much like one that you would use for a conventional business.
A business plan to a trader is known as a trading system, and like a business plan it is used to define the exact strategy of actions that are used to create a profit.
The key to successful trading is a properly implemented strategy, not subjective decisions based on your opinion of the market or the news of the day. The three key ingredients to becoming a successful trader are:
- A proven trading system, either one you create and perfect yourself or someone else's
- The tools to implement the system – adequate capital, access to market information, etc.
- The ability to implement the system, including the mental toughness to trade the market again after a series of losses
These three steps to becoming a successful Stock trader are discussed in detail through articles and charts on this website – Stock Trading Review.com .
If you would like to learn more about how to trade profitably, please feel free to read the articles on our site.
I hope this lesson helps you in your understanding of how to trade Indexes. If you have any questions, please email us by using this contact form and we will do our best to answer them for you.
We sincerely hope that our website helps you to improve your trading results and build your wealth – that is our wish for you.
Regards,
The Team
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Readers are advised that these articles and stories are written solely for informational and educational purposes and are not to be construed as an offer to buy or sell Securities. We cannot give you Investment Advice.
We do not recommend particular Stocks, Options, Index's, Funds or any other security of any kind. If particular Securities are mentioned, they are mentioned only for illustrative and educational purposes.
Our goal is to teach you how to identify and trade trends for yourself so giving trading advice would be contrary to this principle.
You must back test everything you learn here to satisfy yourself that it works in the Stocks or other markets you intend trading. We specifically do not guarantee that you will make any money by implementing these trading and investing strategies.
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