T2W Trading Community

What instruments can you Trade?

In an earlier paragraph I mentioned that you can pretty much trade in anything. The common assumption is that you can only trade in indices, but you can trade in virtually anything you wish. Over the next few paragraphs I shall be covering the main markets you can trade in and how these work.

Stock Index Futures:

We have covered these in some detail before: remember when I was talking about the FTSE100, the DJIA (Dow) and the Nikkei? Well all these and more, listed below, come under the umbrella of stock index futures. Basically they are an easy way to trade in a whole group of shares, instead of just the one share.

One important point you should realise that the current quoted price of the future may not correlate to that of the actual index. There are reasons for this as follows:

Index futures tend to have a natural premium built into them called a fair value premium which is above that of the index you are wishing to trade. This is because there is a natural financial advantage to trading in the future as opposed to physically buying the underlying stocks for cash, which is based on the interest advantage of buying the future on margin, an act that requires far less capital than buying the equivalent number of shares outright. Since interest rates are usually higher than any dividend payable on the shares, you stand to gain more interest from the money you save, by buying on margin, and this is reflected in the (usually increased) price of the future in question.

Future prices react to news and events much more quickly than the underlying index in question. Therefore the live price of the index you see on some sites and services may not tie directly with that of the index future.

Now I know the above was a bit heavy and like you, I sometimes have to reread the first one especially (and I wrote it LOL!). I have taken the liberty to tell you the above so you know. You need not worry about it much at all. As we always trade from the quotes that we receive from the FB, and the prices we use more than most are those that are supplied by the FB.

We only use online services to research trading patterns and trends in charts. We don't stress too much about the fact that the underlying price of the stock, index or whatever it is were trading doesn't match perfectly with the REAL stock quote etc. So don't feel that you are being ripped off by the FB if the prices don't match. In fact some FBs now allow you to chose whether you wish the quote to be relative to that of the actual Index or the FB's own book price.

At the current count there are 26 variants of stock indices that you can trade in. Now I know what you are thinking. I said that there were only 3-4 major league indices out and that is true. However, many of the indices break down the main index into parts, larger or smaller. For instance the FTSE can be traded in the following: FTSE100, Daily FTSE Index, Daily FTSE Futures, FTSE250 and so on. Essentially they are little different, except the larger FTSE250 comprises the top 250 companies and not 100. The daily futures can only be kept open for one day.

Daily Trades:

A quick word on DAILY FUTURES, simply known as Daily trades. These are trades that are designed to have a small spread, however, they only have a shelf life of 1 day of trading. So for instance if you traded the Daily FTSE Index - this is a trade which is quoted on the actual figure or as close as of the underlying and not like that of the FTSE Future mentioned above. You can open Daily trades during any time on the day. You must remember though that they will be closed at the end of that index’s trading hours. So the FTSE DAILY INDEX will be open from 8am to 4.30pm GMT. The trade can be opened and closed at any point during those times, but will be closed automatically as the trade expires at 4.30 GMT that day or at 9.30pm GMT for US trades.

Before you trade DAILY quotes, make a note of the times of trading relative to your own time. For instance I find it difficult to trade DAILY Quotes on the Nikkei because of the massive time difference between the UK and Japan. However, I can trade the FTSE obviously and the Dow as that opens mid afternoon and closes at night GMT. So look at the time differences when trading daily futures/quotes.

You don't have to worry too much by trading contract months. Only trade a daily if you are sure that the money you will save in the spread is worth the risk of the trade expiring within hours rather than weeks or months. A great deal of what you will be doing is based on common sense: it just takes a little thinking, that’s all.

One thing I would like to add and will become more apparent when you begin trading for yourself: most of the following trading products supplied by financial bookmakers tend to be Daily, Weekly, Monthly or the standard 3 month contracts. All FBs have the 3 month standard term contract, the same is true for the Daily contract. Some also offer a Weekly and Monthly contract. Others offer a Rolling contract, which to be honest I have never traded.