Guide T2W Guide to Indices

Quercus

Well-known member
399 7
T2W Guide to Trading: Indices
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Edited by Quercus - Last Updated: 10th January, 05

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Editor's Message:
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Welcome to the T2W Indices Guide. We hope that this new initiative will over the next few months develop into a valuable resource for both new and experienced traders alike.
As the editor to the guide I am simply that - the editor. There are many of you out there with more knowledge than myself, and I would like to invite you all to add to this guide. Please post and I will add all new and improved information to the guide. After this your post will be removed in order to keep the guide as concise as possible.

If you'd like to volunteer as a particular forum editor please email us at [email protected] with a description of your trading experience and the reasons why you think you'd make a good editor.

I am therefore I edit!
Quercus
16th Feb, 04

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How does it work?
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  • Each forum will have a guide which will act as a digest of information concerning the subject of that forum
  • The guide will always be the top thread in the forum
  • Each guide will have an editor who's job it will be to update the guide
  • Please contribute to the guide in any way you can. The editor will integrate your suggestions, feedback and text into the guide - whereupon your post will be removed.
  • For a full description and to discuss the guides further please use this thread

Indices Guide Contents
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1. The Guide
2. FAQs
3. Recommended Forum Topics
4. Glossary
5. Further Resources
a) Related Links
b) Recommended Reading
c) Brokers


1. The Guide
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1.1 Introduction

This guide is intended to be an overview to the main indices which traders encounter in the exchanges around the world. It will endeavour to explain the origins of each index, and provide a brief explanation as to how the index value is calculated. As will become apparent, indices vary from exchange to exchange, and as such it is important that we know how the figures are arrived at before we can begin to use the information that they provide.
It is perhaps worth noting here that this is quite simply a guide to each index, and not a guide to trading indices. Any links to trading will be entered at the appropriate place, to assist readers in their knowledge quest.

1.2 Overview

Standard and Poor's and Morgan Stanley are known as the world leaders in the production of economic data, which is used throughout the world's financial markets. In late 1999 the two organisations came together to provide an industry standard classification system known as the Global Industry Classification Standard, or GICS.

There are literally hundreds of thousands of indices covering any company in any sector of industry you care to imagine and it is not the intention to discuss these here. What we will concentrate on however, are the main indices which relate to the respective financial exchange, plus a number of the more commonly referred to indices you might encounter in your trading.

For more information on specific sector indices take a look here:

www.dowjones.com
www.ftse.com

1.3 Quick Reference

A list of links to the various exchanges for trading hours and holiday dates. Please note that all times are in local time to each respective exchange.

1.4 The Indices

  1. The FTSE
    Also known as the Footsie, it's official title is Financial Times Stock Exchange Index. Again there a too many to mention, but the main ones of interest would be the FTSE100, FTSE250 and FTSE All-Share. The one referred to by traders is the good old Footsie 100, which reflects the value of the top 100 companies listed on the London Stock exchange as valued by Market Capitalisation. In simple terms a figure which represents the value in pounds of the total value of one share in each of the top 100 companies.
    In trading terms, people either trade FTSE futures, futures options, or a related instrument as produced by the various SB companies which is a figure derived from both the cash index and the futures price. For example Deal 4 Free refer to it as the UK100.
    More information here:www.ftse.com
  2. The DJIA
    The Dow Jones Industrial Average, more commonly referred to as The Dow, and as the name suggests it is not an index at all! It is in fact an average. First created by Charles Dow in 1896, it was originally made up of twelve stocks, through the years this became twenty, and now consists of 30 of the top blue chip companies. It is a figure calculated from the total value of these stocks which is "averaged" using a mathematical formula. Perhaps the better known of the US indices but far from the most important, due to the obviously small representation of the whole market.
    Traders will use futures, futures options, or again an SB derived instrument, Deal 4 Free refer to their derived instrument as the US30. Also traded by many using the e-mini contract known as YM and traded on the ECBOT. Deal 4 Free refer to their derived instrument as the US30.
    More information here:www.djindexes.com
  3. The S&P 500
    Commonly known as the Spooz, and widely regarded as the benchmark index which reflects the overall sentiment of the US market. It consists of a representative sample of 500 leading companies in the main industrial sectors of the market. With a history that dates back to 1923, the index as it stands today was established in 1957 when it was increased from 223 companies up to the present figure of 500.
    Related indices are the CBOE (Chicago Board of Options Exchange) Volatility Index, known as the VIX, which is a measure of expected market volatility. As well as the S&P Banking Index, known as the BIX, touted by many as a useful indicator of the overall S&P500.
    Traders can choose futures, futures options, Exchange Traded Funds (ETF's), SB companies, or the baby brother of the Spooz which is the EminiS&P500, commonly known as ES. This is the exclusively electronically traded instrument available via the Globex Exchange, and is perhaps the most widely traded futures instrument in the world.
    More information here:www.standardandpoors.com
    and here:www.cme.com/get/
  4. The Nasdaq
    The Nasdaq Composite index is the best known technical index in the world. Sometimes referred to as The "Comp", it contains all stocks listed on the exchange, which is currently over 4000. The Index was born in July 1984 at a base level of 100! The Nasdaq 100 is another well known index of the exchange which represents 100 of the largest non-financial companies listed on the exchange based on weighted market capitalisation.
    Another Nasdaq related index is the Phillips Semi-conductor Index, also known as the Sox. This is highly regarded as a useful indicator of the overall market.
    This market can easily be traded through the Exchange Traded Fund QQQ, commonly referred to as The "Cubes", which tracks the Nasdaq100 index. Alternatively traders can use futures contracts, options or the well known SB derivative contracts.
    More information here: www.nasdaq.com
  5. The Dax
    The Dax reflects the German blue chip segment comprising the largest and most actively traded German companies that are listed on the Frankfurt Stock Exchange. It was established as the benchmark German index in 1959 when it took over from the Borsen-Zeitung Index. Only the publicly available or "free float" stock issued is taken into account when assessing companies for inclusion in the index.
    Mainly traded through futures and via the usual SB company instruments.
  6. The Eurostoxx 50
    This is the Index prepared by Dow Jones which represents 50 of the top companies traded on the Eurex Exchange. These are only companies from Continental Europe and so exclude UK companies. Nokia is a market heavyweight of this index and as a result, any activity related to this stock has a direct impact on the index.
    Mainly traded via futures contracts.
    More information here:www.eurexchange.com
  7. The Nikkei 225
    The Nikkei 225 Stock Average is like the Dow in not being a true "index". The value is calculated as the summation of the values of 225 blue chip companies listed listed on the Tokyo Stock Exchange, divided by a numerical divisor.
    Again tradeable via futures, futures options and through the various SB company instruments.
  8. The Hang Seng
    The leading index of the Hong Kong Exchange. It is a market-value weighted index of the 33 largest companies listed on the Exchange. As such it is dominated by the largest company on the market, which is HSBC. As a result of this the futures contract has a much greater volatility than other instruments.
  9. The CAC 40
    The index which represents the performance of the Paris Borse as a reflection of the value of the top 40 companies of the French Exchange.
  10. The SPI
    This is generally accepted as the benchmark index for the Australian Stock Exchange. It's official title is the S&P/ASX200, and is the index as calculated by Standard and Poor's to represent the value of the top 200 companies listed on the exchange. This index represented approximately 90% of the total market capitalisation of the exchange in June 2002, and is clearly one of the most accurate of all the global indices.
    Tradeable via futures and SB instruments such as Deal 4 Free's Aussie 200 contract.
    More information here:www.asx.com.au
  11. The NZSX 50
    I had to give it a mention, despite being the minnow of all of them!
    Comprised of the top 50 companies as listed on the NZ Exchange by free-float market capitalisation. The NZX50 took over from the NZSE40 in March 2003, and is unique in the respect that it takes into account dividends payable by the constituent companies. This is due to the fact that dividends payable are somewhat higher than is the norm in other markets. This index is dominated by Telecom New Zealand which makes up approximately 25% of the index. In daily trading Telecom frequently accounts for 50% of the turnover of the whole market.
    Not tradeable, unless you're interested in Deal 4 Free's contrived instrument which reflects the top 10 companies!
    More information here:www.nzx.com

1.5 The Other T2W Guides

Here is a list of links to all the guides that T2W runs.

T2W Software Guide
T2W Data Feeds Guide
T2W Options Guide
T2W Forex Guide
T2W First Steps Guide
T2W Techies Corner Guide
T2W Security and Virus Information

2. FAQs
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  • What is an Index?
  • How can I trade the Dow?
  • Why doesn't my SB company's Dow equivalent contract directly match the Dow Jones Index?

What is an Index?
In very simple terms an index is a figure which is calculated in various ways to represent the value of a group of stocks, either in a specific sector or across a whole market.

How can I trade the Dow?
Make a choice from the various contracts available including futures, options on futures, SB companies, ETF's or invest in the many Index tracking funds offered in the market.

Why doesn't my SB company's Dow equivalent contract directly match the Dow Jones Index?
Because it is based on a complicated mathematical equation (algorithm), which is derived from a combination of the cash and futures values, and who knows what else! If you work it out could you please send me a PM!


3. Recommended Forum Topics
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Trading The Dow Summary
Started by Newtron Bomb
A compilation of the weekly trading summaries as provided byChartman

FTSE 100 January
Started byBonsai
The current month's trading diary for the UK index.

Indices Page
Started bynigelpm
A great quick reference guide to some of the main indices, set up voluntarily by nigelpm.

Options Trading Thread
Started byMorris
A good introduction to the world of options with some more useful links.

4. Glossary
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AMEX
The American Exchange

ASX
Australian Stock Exchange

Borse
European name for Exchange

CBOE
Chicago Board of Options Exchange

CBOT
Chicago Board of Trade

CME
Chicago Mercantile Exchange

LIFFE
London International Financial Futures and Options Exchange

LME
London Metal Exchange

LSE
London Stock Exchange

Nasdaq
National Association of Securities Dealers Automated Quotation system

NYSE
New York Stock Exchange

NZX
New Zealand Stock Exchange

5. Further Resources
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a) RELATED LINKS
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Basic Trading Information
An introduction to Spread Betting

Investment Information
An introduction to Exchange Traded Funds

Commitments of Traders
Useful information relating to outstanding contracts on the US Exchanges


b) FURTHER READING
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Trading in the Zone
By Mark Douglas
Amazon

Reminiscences of a Stock Operator
By Edwin Lefevre
Amazon

Trade2Win Bookstore


c) BROKERS
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Spread Bet Companies

There are several spread bet companies, offering all kinds of products and spreads, varying from “Binary Bets” on FTSE or Daily Dow, through to futures spreads on the indices for several months ahead. Due to the nature of taxation laws in the UK, you are currently not taxed on any profits your make (tax legislation in the UK can of course change without notice).

IG Index
Deal4Free
Finspreads
Capital Spreads
TradIndex
City Index

Direct Access Brokers

Direct Access brokers cut out the middle man, and allow you to deal more closely with your chosen exchange, speeding up trade execution times and opening up a wider variety of products to trade. The downside is that you will pay commission and taxes on your profits - unlike Spread betting - although there is no spread involved.

Interactive Brokers
GNI Touch
 
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bonsai

Veteren member
4,106 11
great stuff Quercus

you might like to think about writing up something about the different ways the indices are calculated.

Dow v S&P for example
or FTSE100 v FT30
 

Quercus

Well-known member
399 7
Just a monthly update, for the FTSE thread I'm afraid. I should put some more work into this guide soon!
Suggestions welcome.
Cheers
Quercus
 

Quercus

Well-known member
399 7
August update done!
Cheers
Quercus
 

Quercus

Well-known member
399 7
Monthly update, which was long overdue!
I've also had to remove the link to the trading ES thread, as it was so out of date. Come back China wherever you are! :cheesy:
For those of you interested in still viewing this thread here it is:
Trading ES Qtr2 2004
Cheers
Quercus
 
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china white

Established member
979 12
back to "civilised" equities :)

Quercus said:
......Come back China wherever you are! :cheesy: ......

good to be back to UK lads/lasses! :LOL: everything looks a bit different on our site though - I cannot find Trading Psychology thread, there seem to be no new posts from Socrates etc.....

me thinks I have to tell u why I was away for a while - good story anyway.

ok - back in summer quite unexpectedly to myself I got this offer to start from scratch trading volatility on Saudi Riyal (SAR) from one major Saudi bank partly owned by a European house (cannot be more specific, those who know the Saudi banking scene will figure it out :rolleyes: ). Sounded like an interesting job - if u take a look at how SAR/USD spreads behave on any bomb-related news, u can c how much u can cream off it :LOL: Suffice to say here that on caps/floors of 1 yr maturity measured off 3 month LIBOR and SAIBOR (3 months term) u get volatility jumping from 30 to 110+ % within a couple of days - do your own math what P&L u get on a long volatility exposure (which btw u can reasonably easily get from the clients)

the situation in the Kingdom (KSA) back in the summer was very dangerous indeed but hey I thot unlike many others - thez no way Saudi Royal family can be toppled with 20,000 princes and princesses creaming off 40-50 dpb oil prices and firmly controlling EVERY single aspect of Saudi society. A parallel to Iranian Shah is complete rubbish under circumstances.

Plus the Saudi equity market. Probably THE BEST LONG opportunity back in the summer in the whole world.

So I took it.

Made 3 mistakes though:

1) I wrongly assumed my bonus will be defined as a percentage of my bottom line - the way it's normally done. WRONG!!!! - does nor work that way with Islamic banks even owned in part by Euro houses

2) I wrongly assumed that given the seniority level of my position I will have total freedom trading Saudi stocks and oil futures beside SAR volatility. WRONG!!!! The guv on the Treasury floor and the one on the Saudi Equities floor are apparently proteges of 2 different princes who do not like each other too much..... When I went massively short oil futs on incremental advances to 54 area on decreasing volumes (special tribute to Skim again who spent considerable time explaining that particular pattern to dimwits like myself :cheesy: ) there were plenty of eye brows raised round me...... Well u probably followed idiots posting on Reuters at that time unanimously "forecasting" 70 dpb.... had those chaps galore round me.... of coz now they say they all knew 55 dpb was a stiff res :D

Still - to be entirely fair - I did cross the line on that one. In Wahhabi version of Islam u cannot be selling what u haven't got so shorting is generally a dangerous adventure in that part of the world...

3) Worst of all - I assumed that I can befriend a Saudi bird working in the same bank (yep it is possible these days given the bird is from the high circles :cool: ) BEFORE I befriend her parents, convert to Islam etc... etc..... :eek:

Life in a compound in Riyadh where the 1st 2 things u c in the morning are your gorgeous pool and barbed wire is a separate story altogether.

Anyway - long story short - THANKS TO GOD, JESUS, VIRGIN MARY AND ALL THE SAINTS :LOL: I am back!!! And quite certain I will NOT SEE barbed wire again soon!

Few things off the top of my head:

1) very impressed with the Friday daily bar on CW.L on 30 mln + daily volume. Will be looking to buy any pullback on Monday. I know it's a dying telecom fundamentally - especially after japan sale - but 120 pp is on the cards - and pronto :LOL:

2) not a good close for STAN.L below 10 quid on a higher volume. However given S&C is viewed as a constant bid target by the boys, and given very rigorous and transparent practices at S&C for the purposes of year end window dressing - I wud not get carried away by shorting the issue here. Me thinks market's just shaking off smaller longs here.
 
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TheBramble

Legendary member
8,394 1,170
Pretty much the same sort of Summer for me China - 2 weeks in Butlins Minehead.

Seriously though, GREAT to have you back (safe & sound) and a really interesting story.

But just for clarification, how did your bonus get calculated; and what was the result of your approach to the yound Saudi lass? I understand they cut things off in that part of the world...
 

roguetrader

Senior member
2,062 49
"Befriending" a "True Saudi bird" that is one who is of pure Saudi origin is a very good way to get your head removed, high circle or not.
 
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china white

Established member
979 12
Bramble - as a % of SALARY, not P&L with 100% salary cap. That means u have no incentives whatsoever to do anything once u make about 2 times your target.

Roquetrader - things hv bn changing in KSA over the past 10 yrs as well, u can now have female dealers on the floors - it is still illegal to mix men and women on the same floor but Mutawa - religious police - has no longer got the power to just march into a bank and enforce it.

There are now quite a few boys and girls from "good" families getting educated abroad and even having western passports. For them such "mixed" floors r perhaps the only place to be - they actually luv it, serious.

In my particular case she is coming to London later in Dec, officially for shopping. She'll hv 2 b accompanied by her bro-in-law who is a nice lad, has a cellar full of whiskey in his home in KSA, drives bikes thru the desert and generally can't wait till he gets out...... :) so - "la aventura se continua" I suppose.... :)
 

china white

Established member
979 12
HOLD ON - I just noticed - what the bloody hell is Serbian flag doing at the bottom of me messages?????? Am I accused of being some sort of Miloshevich in my absence????? :)
 

roguetrader

Senior member
2,062 49
china white said:
Roquetrader - things hv bn changing in KSA over the past 10 yrs as well, u can now have female dealers on the floors - it is still illegal to mix men and women on the same floor but Mutawa - religious police - has no longer got the power to just march into a bank and enforce it.

There are now quite a few boys and girls from "good" families getting educated abroad and even having western passports. For them such "mixed" floors r perhaps the only place to be - they actually luv it, serious.

In my particular case she is coming to London later in Dec, officially for shopping. She'll hv 2 b accompanied by her bro-in-law who is a nice lad, has a cellar full of whiskey in his home in KSA, drives bikes thru the desert and generally can't wait till he gets out...... :) so - "la aventura se continua" I suppose.... :)

I have lived and worked in Riyadh for 5 years. Things indeed have changed a lot over the years but some things remain the same. The most appropriate line I have ever come across to describe western/Saudi interaction comes from the last of the mohiccans.
"Don't try to understand them, or make them understand you, for they are a breed apart."

If she is true Saudi, and not possibly from a mixed marriage of Saudi male western woman, then to consort with you beyond the confines of your work will bring shame on her family, an indiscretion she could pay for with her life.
 

china white

Established member
979 12
where did u stay in Riyadh mate? I did at Kingdom and later Granada compounds. Rings any bells? :)

and what was your job there if I may ask? was it banking or oil related by any chance? when did u leave KSA? sorry if I am asking personal Qs....
 

Quercus

Well-known member
399 7
Well well well, Great to have you back me old China! :LOL:
And you've rejuvenated this thread, to remind me of what a slackarse I've been! (Last updated in early October!) How embarassing. :rolleyes:
I'll get it sorted out again soon - I promise.
Looking forward to more educational postings from yourself, and perhaps even a resurrection of the ES thread or something similar we all hope. ;) I've moved over to NQ at the moment due to the smaller point size!
Glad to hear you've at least been continuing the "international adventuring of independant means". :LOL:
Cheers
Q
PS - Go into personal profile and have a play around with the flags. ;)
 

china white

Established member
979 12
cheers

Quercus said:
.........I've moved over to NQ at the moment due to the smaller point size!
...........
PS - Go into personal profile and have a play around with the flags. ;)

hmmmm..... strange biz with the flags..... :cheesy:

btw Q - u sure mate there is much of a difference? mini spooz point value is 50, nq's is 20 if i remember right. sp's daily volatility is roughly 1% (wud be exactly that at annualised 15.7%), nasdaq's daily volatility is about 2%+ these days isn't it? so moneywise any move is roughly same for u whether u r in sp futs or naz futs :LOL:
 
 
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