What is S&P 500?
The Standard & Poor’s 500 or S&P 500 or S&P or SPX represents a weighted stock market index comprising the 500 largest companies by market capitalization listed on the New York Stock Exchange (NYSE) Nasdaq. Founded in 1957, S&P 500 represents the strength of the US economy.
It is often used as an indicator for business cycles.
How to Trade S&P 500?
To trade S&P 500, please follow these practical rules:
- Before you enter any trade, analyze the current market and define the take-profit price level and stop-loss price level before making any investment.
- Be careful to enter into trades during the recession and high US inflation.
- Short-time predictions for indices have low accuracy, and it is hard to trade an S&P 500-day trader.
- Avoid long-term buy investments for S&P 500 if Shiller PE Ratio or price-earnings ratio, based on average inflation-adjusted earnings from the previous 10 years, is too high.
- You should limit your exposure and manage your risk. It is advised not to let your exposure rise more than 5%.
- Never trade without stop-loss!
- Keep your emotions aside while trading.
- Economic data is known to stir the market and create volatility. Keep your head in the game whenever high-impact data is released.
- Keep a record of your trades. Journal all your trades. It will make you more confident, and you will analyze your trades in a better light. Review this journal every week to figure out how your decisions impact your profit and losses.
S&P 500 chart and current price
S&P 500 Trade Benefits
There are many reasons why you should trade S&P 500, the most prominent being getting exposure to the US market while diversifying the portfolio. Both long-term and short-term traders can benefit from it.
Some other benefits are as follows:
- The technical chart patterns are depicted clearly. This makes finding prominent entry and exit points very easy.
- The spreads are tight, which means that trading costs will be on the lower side.
- Like mutual funds, the S&P is also covered by experienced analysts. They continuously conduct comprehensive fundamental and technical analyses on the market.
- You get more flexibility in terms of time as the S&P trades almost 24/5.
Guidelines for Finding the Right S&P 500 Trading Strategy
When it comes to trading, irrespective of the asset you are interested in, curating a good strategy is necessary. You can start with limited capital, but you can easily make it big if your strategy is good. This holds specifically true in SPX trading.
While you are free to design your own trading path, here are some common guidelines and principles that most successful traders swear by:
If your trading strategy is effective, you will focus better as it will filter the market noise. It will enable you to trade with increased focus and find beneficial entry and exit points.
Your strategy will predetermine your levels of exit, entry, and trade size. Even before you enter the trade, you must have a clear idea about how much you will be risking and what you will be gaining.
One must never trade when high on emotions. Your strategy will enable you to compartmentalize better. You will have a defined guideline regarding risk management, leverages, and points of entry and exit.
The Trading Hours
The market for S&P operates almost 24/5. The main market houses, or the time that most professional traders prefer, are between 9:30 AM to 4:00 PM EST. The main reason why these hours are considered more suitable for trading is that, as a trader, you will get more liquidity and tighter spreads.
Once you have an idea about the operational market hours and the principles you should consider while making your strategy, the next and the most important step is to create that profitable strategy. You can choose between fundamental and technical analysis as your basis for creating a good trading strategy. Many experienced traders factor both while devising their strategies.
Using Technical and Fundamental Analysis for S&P 500 Trading
First, let’s figure out what these techniques individually stand for.
- Fundamental Analysis for S&P 500
In general, we consider the economic data as fundamentals. This economic data can be fetched from the economic calendars that different companies and government bodies release. Types of economic data that can move the S&P are given below:
- The Consumer Price Index (CPI)
- Employment Ratio
- Gross Domestic Product (GDP)
- Interest Rates
This data is used to identify the changes required to be made to the Federal Reserve Bank’s interest rates to stabilize the economy. If the economy is overheating and the inflation is on a higher side, the bank will increase the interest rate to combat the situation. These increased interest rates fetch higher yields on government bonds. This encourages investors to move towards bonds from equities to increase their income and decrease the capital risk.
This movement can decrease the S&P prices as the market is now witnessing increased selling pressure. When making your strategy, it is essential to consider all the fundamentals that we have stated. The idea behind this is elementary – the underlying trend will always reflect the US economy.
- Technical Analysis for S&P 500
There are many technical indicators that you can employ while formulating your strategy using technical indicators. Please use them in combination. Generally, traders use price action, support and resistance levels, oscillators, triangle price patterns, moving averages, and Ichimoku in different combinations. These are the most preferred ones, but the list is not limited to these indicators.
The idea here is to chase a trend. Most traders want to increase their accuracy and profit by following the ongoing trend to find out buy-signals. For example, let’s assume that the S& P has been going in an upward movement. In this case, the traders will prefer to buy at support levels. Similarly, if the S& P has been going in a downward movement, the traders will prefer to sell at resistance levels.
It is important to be certain when you are looking for entries using technical indicators. Therefore, many traders will use the Relative Strength Index to ensure that these entry signals are fine-tuned.
We have already asserted that there are many technical indicators out there that will fit different strategies differently. There are, however, some time-tested indicators. Such as:
- The Relative Strength Index or the RSI.
- The Stochastic Oscillator or the Stoch
- The Moving Average Convergence Divergence or the MACD
These are some popular oscillators. Some favorite patterns are listed below:
- Head and Shoulders
- Bull/Bear Flags
Before deciding whether you want to base your S&P strategy on fundamental analyses or technical analyses, we would encourage you to understand how the two work. It is important to know such technicalities before you start trading. There is no rule that you have to choose one of the two. In fact, most successful traders used both ways to create a profitable strategy.
Different Holding Periods for S&P Trading
The holding time period completely depends on the traders and their strategies. Here are some time-tested holding periods. You can choose the one that suits your trading personality.
Day Trading or Scalping: As the name suggests, the entire trade culminates within 24 hours. Here, the traders try to capitalize on the smallest price moves using short time frames. This is done with the help of the price action tool. S& P attracts day traders because it operates almost 24/5 and offers high liquidity and tighter spreads.
Intra-day: Traders that follow this time period are generally looking for short-term trades, that is, trades that do not last for more than a couple of days. Traders use technical analysis for intra-day trading mainly because SP500 has clear daily momentum moves and technical patterns. Some traders also use trading news events and fundamental analysis as well.
Swing Trading: The timeline of swing trading is for a few days to a couple of weeks. Unlike day trading and intra-day trading, swing traders look for medium-term moves. Swing traders formulate their strategies using both fundamental and technical analysis. While swing traders make fewer trades, they prefer higher risk-reward trades.
Can you day trade the S&P 500?
Yes, many corporations, prop companies, and retail traders trade S&P 500 using day trading strategies. Usually, they open trades after the opening range (30 minutes or 1 hour after markets open) and enter into trades based on technical analysis patterns, fundamental research. However, most traders keep trades for at least a few days or in the long term several weeks, months because of better trading accuracy.
Some trades traders trade S&P 500 gaps and various day trading strategies too.