How to Trade FTSE 100
FTSE trading is a popular pursuit for those interested in financial markets. Originally a joint venture between the Financial Times and the London Stock Exchange (LSE), the FTSE 100 is an index of the UK’s top 100 companies by market capitalization. Managed by the FTSE Group, the index is updated and published every 15 seconds.
In this piece, we’ll cover the key tips and strategies for trading FTSE 100, which both beginner and advanced traders can use to gain an edge over this popular market.
FTSE 100 Trading Basics
The FTSE 100 is one of the most widely traded indices in the world. Trading the index began in 1984 at a level of 1,000, and on May 21, 2018 reached all-time intra-day and closing highs of 7868 and 7859 respectively. The FTSE 250 and the FTSE 350 represent the next largest companies outside of the top 100.
It is worth remembering that while the FTSE 100 is focused on the leading UK companies by market cap, a majority of the revenues of the constituent companies are made overseas, so it may not be as strong a barometer of the domestic economy as it appears. It also means that if the Pound falls, the FTSE often rises as companies benefit from their products being priced more competitively overseas.
As with other stock markets, FTSE trading can, where permitted, be undertaken through derivatives such as CFDs and spread betting, which enable you to speculate on the price movements of the index.
Understanding how the FTSE 100 market works
When it comes to knowing how to trade the FTSE 100, the first step is to understand how the market works. The figure quoted for the FTSE 100 is calculated using the total market capitalization of the companies in the index. When the index is revealed as being ‘up’ or ‘down’, the change is quoted against the previous day’s close.
Traders should be aware of the nature of the constituent companies in the index as their performance – and in turn the index – can be affected by a range of diverse and global political and economic factors.
FTSE 100 Companies: Top 10 Ranking by Market Capitalization
|Name||Sector||Market cap*||Weight (%)*|
|Royal Dutch Shell (A and B shares combined)||Oil & Gas||£199.4 bn||11.2|
|HSBC Holdings||Banking & Financial Services||£133.2 bn||7.4|
|BP||Oil & Gas||£104.2 bn||5.7|
|British American Tobacco||Tobacco||£63.7 bn||3.4|
|Unilever||Consumer Goods||£52.4 bn||2.6|
|Rio Tinto||Mining||£48.1 bn||2.3|
|Reckitt Benckiser Group||Consumer Goods||£46.8 bn||2.2|
Sources: London Stock Exchange, Bloomberg
*Correct as of December 4, 2018
What Moves the FTSE 100 Market?
It’s also important for traders of FTSE 100 to know what moves the market. Factors which affect price movements include political and economic events, interest rates, earnings reports, and commodity prices.
Political and Economic Events
Political and economic turbulence can have a significant impact on indices, and the FTSE 100 is no exception. Naturally, different events can affect the index in different ways. For example, after the Brexit referendum, the plunge of the Pound has been a boon for the overseas profits of FTSE 100 constituents, a factor contributing to the index rising to in excess of 7750 in July 2018. With around 60% of the FTSE 100 company revenues coming from outside the UK, falls in the Pound’s value can have a very positive impact.
However, during the financial downturn of 2008, the FTSE 100 index suffered its worst ever year, falling by 391 points in a single day at one point. The plunge was fueled by the banking crisis and fears of a global recession, and mirrored the falls of other major stock markets around the world.
Interest rate adjustments can have a noticeable effect on the FTSE 100 index. When they rise, investment in FTSE 100 equities often falls due to decreased corporate profitability caused by higher interest repayments.
There have been a number of interest rate hikes since the inception of the index in 1984. For example, in August 2018, The Bank of England base rate was raised to 0.75% representing only the second rise in a decade, prompting the FTSE 100 to slip by more than 1% on the news.
Traders should pay attention to the earnings reports of major FTSE 100 constituents. Valuations are in part driven by expectations, and giant individual stocks such as Shell and GlaxoSmithKline are capable of dragging the index higher or lower by themselves.
The FTSE 100 index is influenced greatly by commodity price fluctuations due to its heavy bias towards oil and mining stocks. Indeed, there are five oil companies in the FTSE 100 and their share prices, in turn, are affected more by events in the Middle East than in the UK. Additionally, around 10% of the index is composed of mining companies, which are sensitive to supply and demand in countries such as China.
FTSE 100 Trading Strategies and Tips
The following strategies and tips will help maximise your chances of trading FTSE 100 successfully:
- Decide on your strategy: Position trading, swing trading, day trading and scalping are all options you can choose when trading the FTSE 100. Position trading is a longer-term strategy with traders holding their position for weeks, months or even years. Swing trading is more medium term, while day trading and scalping represent a short-term approach, making a high volume of very frequent trades.
- Study the charts: Look at longer-term charts such as daily and weekly charts to get a feel of market sentiment. Assess recent price action to get a feel for what the market may do that day. Our FTSE 100 live chart is a key resource to use.
- Prepare an intraday chart like a 2 hour or 4 hour chart: The FTSE intraday timeframe chart is used by many professional and beginner traders alike to trade the FTSE 100. You may want to prepare the chart by placing horizontal support and resistance lines according to the most important levels of the last session of trading, to provide a context to trades. Look for the patterns to fit with your support and resistance levels; patterns to look out for might include a ‘shooting star’ or ‘double top’.
- Look out for FTSE trading signals: Assess the candlesticks and patterns as they present themselves during the trading day. Is the FTSE in a trend? Look for momentum trades, reversal trades, trends in either direction, and trend channels.
- Assess the reward and risk: Before placing a trade, work out the reward to risk ratio. A 2:1 ratio is a popular choice, but traders should never go below 1:1.
- Place stops and profit targets: Based on your reward to risk ratio above, set a stop loss just outside a recent swing high or low. Then, set a reasonable target for a positive reward to risk ratio.
- Know the FTSE 100 Trading Hours: FTSE tends to be more liquid during UK’s business hours making it easier to get in and out of the trades are you desired price. The FTSE trading hours to bear in mind are 8:00 to 16:30 (UK time).
Further reading on FTSE 100
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