A Complete Guide to Trade in London’s FTSE 100 Index

The Financial Times Stock Exchange 100 Index (FTSE 100 Index) is a benchmark index that is most widely tracked by the investors around the world. Originally formed by the joint venture between the Financial Times and the London Stock Exchange (LSE), the FTSE 100 Index includes United Kingdom’s top 100 companies by market capitalization.

The index is updated and published in every 15 seconds and the companies which make up FTSE 100 are analysed to readjust the index every three months. Under this process, the market capitalization of the companies are calculated to evaluate if it continues to sit among the top 100 players or need to be replaced with other companies having higher market capitalization.

Investors or traders cannot buy FTSE100 index like any other equity instruments. Instead, there are two ways of investing in it- one is buying ETF, which is usually preferred by long term investors, and the second one is spread betting or contracts for difference (CFD) which is popular amongst traders. CFDs allow the traders to take a long or short position and to make speculations regarding the movements of the price on the index to make profits.

London’s FTSE 100 has gained more than 9 percent since the 2008 financial crisis. Managed by the FTSE Group, the index has time and again shown its nature to be impacted with several driving factors, including currency movements, political and economic events, interest rates, earnings reports and commodity prices.

LET’S HAVE A LOOK AT SOME OF THESE FACTORS AND THEIR CO-RELATION WITH THE INDEX.

1. Currency Movements: It is generally seen that if the pound falls, the FTSE 100 index rises. This is due to the foreign earnings that many FTSE 100 companies have which includes the fact that as sterling weakens more foreign currency can be bought, and the goods become less expensive for the foreigners to buy, which eventually leads to higher sales & profit for UK exporters. Currently, approximately 60% of the companies present in the FTSE 100 index derive large portion of their revenues from outside the UK, which means that if the value of the pound falls, the companies will get greater profit and will have a positive impact on the index.
2. Political and Economic Volatility: The events related to politics & economy have direct effect on the indices, and the FTSE 100 accordingly reacts to these events. Like, after the Brexit referendum, the value of the pound plunged, which made the index to rise above the 7750 level in July 2018.
3. Interest Rates: If the interest rate rises, generally FTSE 100 index falls. When they rise, investment in FTSE 100 equities often falls. This is due to the fact that the companies included in the index would experience lower profits due to the repayment of debts at higher interest rate and will ultimately affect the capex plans of the companies. Like in August 2018, when the Bank of England had raised the base rate to 0.75%, the FTSE 100 index fell by more than 1% as this news represented the second rise of the interest rate in a decade.

4. Earnings Performance of the Companies: The strong financial performance of the companies that have more weightage on the index would tend to take the FTSE 100 index on the upward trajectory.
5. Commodity Prices Movement: Around one tenth of the FTSE 100 index comprises of mining companies that have direct exposure to the commodities like gold, silver, iron or other precious and non-precious metals. These companies have the potential to cast a considerable impact on the index with relation to the movement of commodities price dependent upon their supply and demand in the market. Further, the index is also affected by the oil prices and the considerable energy companies in the index.

TRADING STRATEGIES TO TRADE ON FTSE 100

There are several strategies adopted by traders to mint profit while trading in FTSE 100 index. To put across the strong game, one could follow the widely accepted market approach as discussed below:

1. Choosing the right strategy of yours: There are various strategies that the trader could take the position in, subject to the stocks and sectors he wants to trade. These strategies broadly include position trading, swing trading, day trading and scalping, among others. The trader can go for position trading, which is generally a long term strategy in which the traders hold their position on particular stock for weeks, months or even more than a year. Swing trading involves holding stock for medium term (few days to several weeks), while in day trading the trader closes its position in a day only and scalping is a technique for opening and closing the trade in an extremely short duration such as 1 minutes or 15 minutes. Last two approaches are done very frequently and makes high volume.
2. Studying & Analysing the charts: The technical analysts & traders analyses the charts, using various tools to take its position on the index, stocks or other asset class. The traders analyse longer-term charts like daily and weekly charts to take the position on the stocks. Further it analyzes FTSE 100 live chart, finds the correlation & trades on index or stock. Meanwhile, the short term traders like day traders prepare an intraday chart of the time frame like of 2 hours or 4 hours chart. The FTSE intraday timeframe charts are used lot by professionals and traders to understand various things to take trade on the FTSE 100. The charts are analyzed by tools like placing horizontal support and resistance levels which are considered as the most important levels for trading. Then the analysts look for the various patterns like a ‘shooting star’ or ‘double top’.
3. Looking for FTSE Trading Signals: The traders need to find out the signal that shows when to entry and exit the trade and in which stock, given the set parameters selected by the trader. This can be done by analysing the candlesticks and patterns that have been formed during the trading day. Various signals include momentum trades, reversal trades, trends in either direction, trend channels etc.

4. Assessing the Reward and Risk Ratio: The traders should be clear headed with the reward to risk ratio he is looking for before trading on any particular stock or index. Generally 2:1 ratio is preferred, but the traders should work out their own ratios depending upon their priorities and risk appetite. However, it is advisable that one should not go below 1:1 ratio. This can be done by placing stops and working out the profit targets for a positive reward to risk ratio.

5. Know the FTSE 100 Trading Hours: FTSE is generally more liquid & volatile during UK’s business hours, which gives the traders to find out the signal & enter in or out of the trades at the desired price. The FTSE trading hours are 8:00 to 16:30 (UK time).

6. Checking the news: The trader should keep a close check on the macroeconomic events & corporate calendar to understand if there is any public information that could have a considerable impact on the price movement of the stock during the trading session. One should advisably look for both national and international news as any change in global financial market could have a significant effect on FTSE due to inter-woven nature of the economy.