Trading Stock Indexes

All traders, and almost all non traders, are aware of the main US, European, and Asian stock indexes, because these are the indexes that are reported in the news. However, many traders, and certainly most non traders, do not know how the stock indexes are traded, and often assume that they are traded like individual stocks.

The stock indexes cannot actually be traded directly, and are available for information only (i.e. as a way to track the performance of the markets or a specific sector).

Market data is available for the stock indexes, and they can be charted like any other market, but there is no way to make either a long or short trade on the actual stock indexes.

Futures and Options Markets

Whenever we hear a trader mention that they are long on the Nasdaq, or short on the FTSE 100, they are not actually long or short on the Nasdaq or FTSE 100 indexes. They are actually long or short on a futures or options market such as the NQ futures market or the Z options market.

Futures and options that are based upon a stock index are known as derivatives markets, because they are derived from the underlying stock index. There are futures and options markets available for all of the popular stock indexes. Stock index futures and options markets are some of the most popular markets for short term and long term traders alike.

Charting the Stock Indexes

Futures and options markets usually move in synchronization with their underlying stock indexes (e.g. when the CAC 40 stock index moves down, the CAC40 futures market usually moves down).

It is therefore possible to chart the stock indexes while trading the futures or options markets.

There are some advantages to charting the stock indexes instead of the futures or options markets. For example, the stock indexes are continuous markets (i.e. they do not expire like futures and options contracts do), so traders do not need to update their charting software to a new contract every three months (or monthly depending upon the market in question).

Also, the options markets are difficult to chart because they consist of many equally active contracts (with different prices), so charting the stock indexes instead allows a trader to trade multiple options contracts using a single chart.

If you do decide to chart the stock indexes instead of the futures or options markets, note that you still need to update your trading software (your order entry software) to use the appropriate futures or options contract, otherwise, you may find yourself trying to trade an expired contract and wondering why it isn't working.

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