Indices in forex
Indices in forex have become a hot topic over the years, especially recently since the introduction of Deriv MT5 synthetic indices account which has taken the trading world by storm due to the incredible high leverage associated with trading with them; i.e: 1:1000. Before exploring synthetic indices, one must understand what are and the best strategy how to trade indices in forex.
What are indices in forex?
According to IG.com, an index is a measurement of the price performance of a group of subject variables being observed. For example, a group of companies/stock, or a group of currencies, etc.
Based on the definition above, there are a number of indices in forex representing a basket of assets. Among the most common MetaTrader 4 indices in forex are:
Company Indices in forex
These are indices that are mostly recognized and publicly traded by traders around the globe. That goes without saying that most of the best CFD brokers, like ICmarkets and FXPro, offer the following indices to trade with a minimum lot size of 0.1 mini lots.
List of major indices in forex
- US30/ Dow Jones 30
An index that measures the performance of the 30 companies that make up the Dow Jones industrial index.
Provided by the ASX (Australian Stock Exchange) the AUS is a market-capitalization weighted stock market index that constitutes exclusively the top performing 200 Australian companies.
Is another company index that collectively represents the top 30 largest and most liquid German companies.
This index represents the 50 largest blue-chip companies operating within the European nations.
The France 40, also known as CAC 40 index is a market value-weighted index, composing of the 40 top performing companies among the 100 highest market caps on the Paris Bourse. Analysis and news about FR40 provided at investing.com.
The JP225 is a price-weighted index composing of Japan’s top 225 largest blue-chip companies traded on the Tokyo Stock Exchange.
The UK100 enlist the 100 companies with the highest market capitalization listed on the London Stock Exchange.
Also called S&P 500 (Standard and Poor’s 500) is a United States index that tracks the performance of the largest 500 companies listed on the Nasdaq stock market or NYSE (New York stock exchange).
Consisting of the top 100 non-financial publicly traded companies in the US. Also called Nasdaq 100 or US TECH 100
List of minor indices in forex
- CHINA50 – FTSE China A50
- ES35 – Spain 35
- HK50- Hong Kong 50
- IT40 – Italy 40
- US2000 – US small Cap 2000
- CA60 – Canadian 60
- NETH25 – Netherlands 25
- SE30 – Sweden 30
- SWI20 – Switzerland 20
- CHINAH – Hong Kong H shares
- SA40 – South Africa 40
- NOR25 – Norway 25
- TecDE30 – Germany Tech 30
- MidDE30 – Germany Mid 60
Currency Indices in forex
Each index represents the performance of its respective currency relative to the different currencies that it trades against.
- DXY – USD cuurency index
- EXY – Euro currency index
- BXY – British Pound Index
- SXY – Swiss franc Currency
- JXY – Japanese Yen currency index
- CXY – Canadian Dollar currency index
- AXY – Australian Dollar currency index
- ZXY – New Zealand Dollar currency index
Can I Trade Currency Indices in forex?
Generically speaking, most forex brokers don’t allow trading currency indices directly like other assets. However, that doesn’t lower the value of utilizing currency indices in forex as they can be used to heighten your trading consistency.
As mention above, currency indices represent how the particular currency in topic is performing against all its major trading partners. To put it in a nutshell, analyzing a currency index means you are analyzing multiple currency pairs at once. For example, doing a complete technical analysis for DXY (US dollar index) means you now have an overview of AUDUSD, EURSUSD, GBPUSD, NZDUSD, USDCAD, USDCHF, USDJPY, which are the major trading partners for the USD.
How to Trade Currency Indices in Forex – Step by Step
Step 1: Register
Register with Tradingview to get access to the full-featured chart.
Step 2: Select the Asset
Select the currency index of your choice by typing it while on the chart.
Step 3: Select the desired time frame
From experience, the higher the time frame the better. Lower time frames are too *noisy. As such I will be referring to the H4 time frame for example purposes going forward.
Step 4: Change the data view
With the exception of DXY, all the currency indices charts are gappy when using candlestick, as such it would be best to select line graph as seen in the picture below.
Step 5: Apply technical analysis
Do your technical analysis as you normally would. If you don’t know how to do technical analysis, then please refer to “how to do technical analysis” to learn the most effective way to read a chart. The lessons taught in this article are the best to apply when doing markups on currency indices in forex.
Step 6: Apply the Market structure principles
The same principles apply to currency indices as with regular currency pairs as it regards trends and structures.
For example, if the currency index of choice is in a downtrend as shown below, then it means it is losing value against most if not all of its trading partners.
Step 7: Open the Appropriate position
Since we estimate that the currency in topic, AUD for example, is losing value, you would select a currency pair to buy if AUD is the quote pair and/ or sell if AUD is the base pair.
|Asset to SELL||Asset To BUY|
STEP 9: Look for confirmation
Use another Index for confirmation- Since multiple currencies can gain and lose value at the same time, use another currency index in conjunction with each other for extra confluence.
Think of AUDUSD for example, if the AXY is in a downtrend, then look at the DXY chart for buy opportunities. If the DXY is not showing any, it’s best to either wait or look for trading opportunities on other charts.
NB: For an increase in probability, the DXY should be in an uptrend.
Advantage of trading Currency indices in forex
- Gives insight into the overall performance of a particular currency
- Make trading easier
- Makes it easier to find high probability trading opportunities
- Adds confluence to your trading
- Can filter out bad trades
- Can be used as a currency strength meter
- Make chart analysis more efficient
Indices vs Currency: Are indices in forex better than currencies?
Indices, though have higher trading requirements than currencies, significantly reduces a trader’s risk exposure to the market. This is because instead of trading multiple different assets, indices allow a trader to trade all the assets within its basket as one.
Additionally, the average major indices in forex pay more than the average currency due to the difference in volatility. Furthermore, company indices are mostly in an uptrend for the long term, and downtrend for the short term, thus making indices a bit more predictable than currency.
While on the other hand, most indices are very gappy and are hard to read with technical analysis. As such, looking at the chart can be a bit intimidating and confusing.
To further add, being gappy means their a high probability of slippage happening often thus making your stop levels unreliable since the market can open above or below your stop loss and/ or take profit.
To summarize, depending on which indices you are planning to trade, then the currency is a safer choice to trade. If trading only the major indices then a trader can reap greater rewards with less work compare to trading currencies.
Best indices in forex to trade?
Among the different indices in forex to trade, the best ones to trades are among the major indices. This is because the minor indices are usually gappy (as seen below) along with very low volatility compared to the major indices.
Additionally, the earning potential of most minor indices in forex is lower than even most currencies. That means, the time and risk involved in trading minor indices are not worth it, unless you are planning to use bigger lot sizes; which you can use on a currency pair, metal, or major index and make more.
Up to date, the among the best indices to trade is Dow Jones 30, more commonly known as US30.
Can you become rich trading indices in forex?
You can most definitely become a millionaire from trading US30 with a good strategy especially since its earning potential is far higher than any currency. This does not mean the other major indices are not good but compare to DJ30 (US30) they are behind.
Forex indices trading strategy
The best way to trade indices in forex is by trading in the direction of the long term trend; i.e: UP. Of course, there are times when the asset is in a downtrend, however, the lifespan of a downtrend, especially on major indices, is very short compared to an uptrend.
Indices represent a collection of companies’ performance, since companies are always looking to make a profit and expand, indices are mostly trending up. Due to their uptrending nature, the following strategies are more than sufficient to become profitable trading indices in forex:
- Break and retest strategy
Await for the retest of the recently broken structure (demonstrated below), along with confirmation, and open the desire position.
- Trendline/ Channel trading
As mentioned above, company indices are mostly trending upwards, as such, the best tool to have in your arsenal is a trendline.
- Moving averages
Since moving averages are trending indicators, they are a great confluence to add to your forex indices trend trading strategy.
- Oscillator (overbought* / oversold)
Oscillators like the MACD and stochastic can be used to show when an asset is overextended or under extended. As such, they can be used to help know when the market is about to reverse.
Best time frame to trade indices in forex?
Since company indices are more mostly trending upwards, the bigger time frames are more ideal in trading indices. This is to filter the noise (retracements) on the smaller timeframe that can lead to consecutive losses.
I think the H4 is the best time frame to trade indices since it is not too big and it is not too small.
Best forex brokers to trade indices
Of course to trade indices in forex, you need one of the best CFD brokers that you can trust, with tight spreads and low commission. In accordance with that, the list below shows some of the best forex brokers that you can use to get the most out of trading indices on Metatrader.
Best CFD Brokers to trade indices – for US residents
- Saxo bank
Top CFD brokers to trade indices in forex
Best CFD platform to trade indices in forex
Trading DJ30 on Metatrader 4 is conveniently good, as with any other major indices, however, the best platform to trade indices or any CFD would be Metatrader 5. MT5 can do everything MT4 can do and more.
In other words, trading on Metatrader 5 can make your trading easier, especially as it regards managing your trades.
In addition, MetaTrader 5 allows you to see more details on the specification* of an asset.
Among the different uses, this is valuable since MT5 shows the minimum and maximum lotsize your CFD broker allows on any given asset.