Chorlton said:
There are many people who trade the FTSE. However as the FTSE is made up of 100 companies (FTSE100), how can anyone successfully trade this especially using TA as a tool???
For example, I can understand how Support & Resistance levels can be useful when trading stocks but when you have 100 companies (all individual & thus acting differently) how can support or resistance levels be accurate or effective???
I'll have a go at this because it'll make me think about this question that's been bothering me as well. I'm a complete newbie, so check all of this out yourself in case I'm wrong - and then tell me.
The question seems clear: if you have identified price levels on individual stocks at which buyers or sellers seem to have behaved in a certain way in the recent past for whatever reason (maybe you want to call those levels support and resistance or maybe not), then will the sum of many stock prices, i.e. an index, exhibit similar levels? If so, why, when that sum comprises uncorrelated stocks behaving in different ways at different times?
Indices aren't traded direct. (Spreadbetting isn't trading an index, it's trading an bookie's price based on an index that the bookie may decide to hedge in the related future or anything else they feel like, if they hedge at all.)
The closest would be to trade the index futures direct. The future is the index (some sum of the constituent stocks) plus/minus 'fair value'. The future might not seem to be any more of an individual animal based on that, but because it is traded directly, it has its own buying and selling pressures, driven by the usual fear and greed of participants, whether they're technicians, fundamentalists, hobbyists, hedge funds, gamblers, etc. If the futures price gets out of line with the underlying index, arbitrage traders quickly bring it back by simultaneously buying the futures and selling the constituents or vice versa.
So some of the movement in the index futures is caused by the constituent stocks as a whole rising or falling and arbitrageurs doing what they need to do to make the futures stay in line. Some is caused by non-arbitrageurs trading the futures outright without touching the constituents. Some is caused by other behaviour, but I would guess those are the two big ones. Whichever it is, the futures move because they're bought and sold, but the dynamics behind the scenes are more complex than for individual stocks.
Have a look through the Traderpedia, e.g.:
http://www.trade2win.com/traderpedia/Index
http://www.trade2win.com/traderpedia/Futures
http://www.trade2win.com/traderpedia/Arbitrage