How to trade in indices

How to trade in indices

Most of the professional traders are successful because generally they trade only in indices. One can trade in Nifty or Bank Nifty

Most of the professional traders are successful because generally they trade only in indices. One can trade in Nifty or Bank Nifty.

These two products are traded mostly because of the volatility factor involved in it. If one wants to trade in futures and options there are several other instruments available to trade. When one trades in indices regularly one gets an edge.

When you trade continuously in any particular index you get to understand the instrument in a better way. Because of consistent trading in one particular instrument you get to understand its behavior, price patterns and movement it makes.

Slowly you will become familiar with the price action and you will be able to gradually predict the direction of the price movement.

Just as a doctor specialises in any particular stream like gastroenterology, neurology, and becomes skillful in it likewise once you trade in any one particular instrument you become proficient in it.

Doctors who specialise in any one subject become more successful and are most sought after. Oliver Velez is a successful day trader from US. He has been trading in Apple stock.

In an interview he said that 95 per cent of his trades are in this particular stock. Liquidity is good in indices as there is less slippage. What does the term slippage mean?

If you want to buy a stock 'XYZ' at Rs 200, but by the time you place the order it was bought at Rs 205 this is called slippage. This happens when you place the order under market order. We face this problem mainly in options.

When we are trading in index there is no need for scanners. Equity trading calls for scanners because of the wide range of stock available to trade.

In the live market each one's emotions vary. With so many stocks available for trade, stock selection becomes difficult. In equity segment, a stock may rise or fall drastically sometimes up to 50 per cent also in a single day.

However, indices have circuits so they are relatively safe to trade. Circuit option acts as a safety net. Most of the stocks follow overall market.

If Nifty and Bank Nifty are in uptrend, stocks also move in the same direction. Most of stocks follow the overall trend of the market until there is a news related to any particular stock or sector.

As stocks follow market, it is better to trade in index. Professionals trade in the same instrument day in and day out and become successful.

(The author is a homemaker who dabbles in stock market investments in free time)

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