S&P 500 Index Trading Strategies

The SP500 index, or S&P 500 index, is a stock index that represents 500 of the largest companies listed on the New York Stock Exchange. It is one of the most popular stock market indices that are tracked by analysts and fund managers and it is also actively traded by short-term and long-term traders. 

In this 'How to Trade the SP500 Index' article, discover what the S&P 500 index is, how it works and how to trade it using advanced trading software, the best times to trade it and three different S&P 500 strategies to get started with. 

What is the S&P 500 Index?

The SP500 index, also known as the S&P 500 index, is a stock index that includes 500 of the largest companies listed on the New York Exchange - one of the most important global stock exchanges in the world. It is managed by the financial rating agency Standard & Poor's (which is where the S&P or SP abbreviation comes from).

The S&P 500 index is considered to be a benchmark index. This means many fund managers use this to compare their own performance against it, while many analysts use this index as a barometer of the health of the US economy and global stock markets. 

5 Facts About the S&P 500 Index

1. The SP500 was created in 1954, but Standard & Poor's had been following the evolution of equities since 1923.
2. Of the 500 original SP500 companies, only 86 were still included in the index on their 50th anniversary.
3. When the SP500 was created, the shares belonged only to three sectors of activity: industry, public services and rail but now include a variety of stock sectors.
4. The SP500 PE ratio (price/earnings ratio) was 22.23 at the beginning of 2023 which is lower than the 24.09 SP500 PE ratio from the beginning of 2022. 
5. The SP500 index can be traded via SP500 futures contracts, via SP500 CFD (contracts for differences) or via SP500 ETFs (exchange-traded funds).

How to Trade the S&P 500 Index in 4 Steps

With Admiral Markets, you can trade the SP500 futures price action by using CFDs (contracts for difference). This tracks the underlying price of the S&P 500 index allowing you to speculate on its price direction. This means you trade long and short potentially profiting from rising and falling prices using leverage. 

1. Open an account with Admiral Markets to access the Dashboard.   
2. Click Trade next to your live account or demo account to open the web platform.    
3. Search for the SP500 index at the bottom of the Market Watch window. 
4. Drag the symbol onto the chart to view the SP500 live price chart and then use the one-click trading feature, or right-click and open a trading ticket to input your trade size, stop loss and take profit level. 

You can learn more regarding the opening and closing times, commissions, fees and typical spreads involved in trading the SP500 index CFD from the Admiral Markets Contract Specification page, as shown below. 

With the Trade.MT5 account, you can trade the SP500 index CFD with zero commission to open and close a trade and a typical spread of 0.6 points. You can learn more about how to trade the market in the FREE 20-day Zero to Hero trading course below. 

3 S&P 500 Index Trading Strategies

There are a variety of different trading strategies and styles to trade the market. Here are just three introductions to trading the S&P 500 index. 

1. Swing Trading the SP500 Index

Swing trading positions open and close the next day or remain open until several weeks later. As you probably understood, this trading style is for those who have another job or who want to trade with little time.

The main idea is to find good trading opportunities in quite large time units such as H4, daily and weekly charts. This will mean having a longer-term outlook and holding trades that are going up and down in profit and loss. Swing traders will use technical analysis to make decisions as well as other fundamental analyses. 

A commonly used technical analysis indicator for swing traders is the Stochastic Oscillator as shown in the SP500 chart below. 

When using the Stochastic Oscillator, traders will use the 80 and 20 lines of the indicator as overbought and oversold levels. When the oscillator goes above the 80 line it may represent an overbought market. When the oscillator goes below the 20 line it may represent an oversold market. Ideally, traders will want to also trade this in line with the overall trend and look for oversold signals in an uptrend or overbought signals in a downtrend. 

2. Day Trading the SP500 Index

Day trading the SP500 index involves trying to speculate on short-term price swings within the index, albeit not as short-term as scalping. Typical timeframes that are used to day trade the S&P 500 index include the 1-hour and 4-hour charts. Most day traders would use technical analysis to support their decision-making. 

The SP500 chart shown above is a type of day trading chart that shows the price action of the SP500 index every 5 minutes. It is a Heiken Ashi chart type but the Admiral Markets MetaTrader platform also allows for bar charts, candlestick charts and many others. There are two indicators on the chart: the 8 exponential moving average and the 50 exponential moving average (EMA).  

A common method among Heiken Ashi traders is to:

• Buy when a blue Heiken Ashi candle is preceded by a red Heiken Ashi candle and when the 8 EMA is above the 50 EMA.
• Sell when a red Heiken Ashi candle is preceded by a blue Heiken Ashi candle and when the EMA is below the 50 EMA. 

This is just a hypothetical example as no testing has been done. But it is a good place for day traders to get started and you can test this type of signals with the type of moving averages that suit you, according to your personal approach.

Stop Loss position to protect your capital:

• For a long position, the Stop Loss will be placed under the last red Heiken Ashi.
• For a short position, the Stop Loss will be placed on the last blue of Heiken Ashi

Take Profit Position: Whether a long or short position, Take Profit is the same distance from Stop Loss, a ratio of 1 to 1 but this is down to discretion.

3. Scalping the S&P 500 Index

How can you scalp using CFDs on the SP500 index?

1. Choose a short-time frame such as the 1-minute or 5-minute chart.
2. Wait for the price to reach an interesting level of support and resistance
3. Open a position based on your forecast of whether the price will rise or fall.
4. Close this position in profit or loss.

Scalping is a style of trading that is extremely advanced and requires a very high level of discipline, responsiveness and experience. It is also important to pay attention to the SP500 live news announcements and economic data releases regarding the United States economy.

The MetaTrader 5 trading platform provides access to more than 80+ technical indicators that can be used to trade the SP500 index. You can download the platform for free and test-drive it yourself. It also provides an in-built economic calendar and algorithmic trading capabilities. 

How to Use an S&P 500 Calculator for Risk Management

Risk management is by far the most important aspect of trading the financial market. Knowing how much you stand to lose or win, the contract size you are trading and how much margin is required to open a trade is essential to trade consistently. 

The Admiral Markets Trading Calculator allows you to calculate your risk management figures just by typing in your entry price, exit price and unit size as shown in the example below. You can use this as an SP500 calculator.

Trading S&P 500 Index Fundamentals

Fundamental analysis involves analysing global macroeconomic data. Traders can use this to swing trade the SP500 index or to use more global macro trading strategies. 

The US-China Trade War

The conflict between the US and China, which has materialised following ongoing acts and comments by the President of the United States, Donald Trump, has also been taken to Mexico and is now a "war" with two battles that are still being fought today.

Although the conflict between the US and the other two countries is not new, right now it is directly and very severely impacting global equity markets (except for the US itself) and in the markets exporters and importers of the three leading countries of the soap opera of the year.

While the situation is generating strength in the US economy in the short term, in the medium and long term, it could be a time bomb that, when it explodes, will be difficult to manage.

For this, the US will be injecting and implementing additional measures that will make the US economy reactivate, such as measures based on monetary policy and interest rate changes.

In early 2023, some companies such as Apple, have already announced plans to try and move away from manufacturing in China to places such as Taiwan and India.

Interest Rates in the US

Interest rates can have a huge impact on the direction of the SP500 index. This is because interest rates directly affect borrowing costs which can affect the bottom line of businesses that borrow money to grow. In 2022, the US Federal Reserve started to increase interest rates for the first time since cutting them to record lows during the pandemic. 

Rising interest rates are one of the factors that cause the SP500 index to enter a bear market in 2022. Moving forward, the pace of interest rate hikes is likely to have a huge impact on the direction of the S&P 500 index. 

Economic Indicators in the US

Economic indicators include reports such as retail sales, inflation, employment, etc. These can have a huge impact on the price direction of the SP500 index as these economic indicators are used by the Federal Open Market Committee of the Federal Reserve to decide upon interest rate policy. 

Analysts will look at these data points to try and forecast the actions of the Fed to position themselves accordingly. Traders can then track the price action using an SP500 chart to look for clues on buying and selling pressures to also participate in any moves. 

The S&P500 and the VIX

The Chicago Board Options Exchange Volatility Index is the benchmark for measuring market volatility. In this case, it takes as a reference the Chicago options market and replicates the S&P 500 index, that is, if the VIX increases - also known as the 'panic indicator' - it means that the volatility in the SP500 is increasing and vice versa.

The VIX was created in 1993 by the CBOE (Chicago Board Options Exchange) and represents the average volatility of the last 30 days. It is also known as the panic index because an increase in volatility usually makes traditional investors prefer to be in liquidity and not take risks until volatility decreases.

A normal VIX is when it is between 20 and 30. Whenever it is at levels below 20 it means that the market is quiet and, therefore, there is no volatility.

This can lead to some apathy when it comes to operating. On the contrary, if prices are above 30, it means that there is volatility and, therefore, nervousness and panic to operate.

How can you use the VIX to trade the SP500?

If the VIX is increasing and we see drops in the market (in this case in the S&P 500) it means that there is pessimism and that prices should prolong the falls. On the other hand, if while the VIX increases the market rises, it means that optimism increases and that prices should prolong the impulses.

Either way, an increase in VIX (therefore increased volatility) means that markets will move more aggressively and that is good for some assets, such as the SP500. On the contrary, if the VIX decreases, regardless of market direction, volatility decreases and, therefore, prices will move less in the corresponding direction.

An increase in VIX will lead to the use of strategies in favour of volatility. A decrease in VIX will lead to strategies against volatility. These types of strategies can be carried out efficiently with derivatives, such as Contracts for Difference.

The History of the SP500 Index

The S&P 500 represents the economic evolution of the US market and economy. Its origin dates from 1923 when the Standard Statistics Company created an index representing the 233 most representative companies of the US economy at that moment.

Standard & Poor's is a financial rating company that was then formed in 1941 from a merger between Standard Statistics Company and Poor's Publishing. After the merger, the S&P index increased to 416 companies.

It was not until March 4, 1957, that this index was extended to the 500 most represented companies and they gave it the name it is known as today.

Since then, the SP500 has dethroned the Dow Jones 30 as the most representative index of the US stock market. In addition, its value takes into account the market capitalisation of the companies that compose it, while Dow Jones is based exclusively on stock prices.

That is, a change of one dollar in the SP500 share of a large company will have a greater impact on the index than that of a smaller company. That is why the SP500 is a more representative index.

Why Trade the S&P 500 Index with Admiral Markets

• Admiral Markets is authorised and regulated by the UK Financial Conduct Authority (FCA), Cyprus Securities and Exchange Commission (CySEC) and many other regulators around the world.
• You can trade the SP500 index CFD with a typical 0.6 point spread and with zero commission on a Trade.MT5 or Trade.MT4 account. 
• You can also trade on stocks, indices, and commodities and access 4,000+ instruments. 
• Trade from the MetaTrader 5 or MetaTrader 4 platforms for desktop, web and mobile and use the exclusive Supreme Edition plugin for more advanced tools. 
• Depending on your jurisdiction and client categorisation, Admiral Markets may provide a negative balance protection policy.

One of the best ways to get started trading the SP500 index is to use a free demo trading account. This allows you to trade in a virtual environment and test your strategies and skills until you are ready to go live. 

Continue Reading:

• What is a Stock Index?
• How to Trade the US Dollar Index
• What is the Dow Jones Index?
• How to Trade the US Stock Market Online

FAQs on the SP500 Index

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.