How to trade the S&P 500
Reading time: 17 minutes
What is the S&P 500?
The S&P 500 is a stock index that includes 500 major companies listed on US stock exchanges. 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 listed on the Wall Street stock exchange, which is the most important global stock exchange and it includes the 500 most publicly traded companies in the American market. NYSE
This is the benchmark index worldwide and that is why it is the most followed by investors, since it is assumed that this stock index has the highest global representation, from a sector and market perspective, in terms of its equity.
SP500 - 5 facts you didn't know
- The SP500 was created in 1954, but Standard & Poor's had been following the evolution of equities since 1923.
- Of the 500 original SP500 companies, only 86 were still included in the index on their 50th anniversary.
- When the SP500 was created, the shares belonged only to three sectors of activity: industry, public services and rail.
- The S&P 500 was the first index to be published daily
The origins of the SP500
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 the 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.
What companies are in the S&P 500?
Companies like Apple, Amazon, Google, Microsoft, Facebook, Berkshire Hathaway, JPMorgan, Exxon, Johnson & Johnson and Bank of America are some of those that make up the cast of entities of the SP500 index.
In the following image we can see the capitalisation of the 10 main entities (as of June 5, 2019) that are part of the S&P 500 in billions of dollars:
Source: Admiral Markets
There are companies that are more important than others by capitalisation, as we can see in the previous graph, but if we talk about sectors, in that case, the main sectors, not only in the S&P 500, but in general of the US economy, are Technology, Health, Financial and Consumer Affairs, in the same order of importance.
Below we can see the percentage weighting of the sectors that make up the S&P 500 today:
Because companies change in value, it is not always the same companies that make up the index, some enter and others leave. In this case, the one who decides on the entities that make up the index and, therefore, has the power to decide on the entities that enter or leave it is S&P Dow Jones Indices, property of Standard and Poor's.
In order for a company to be considered for entering and trading on the S&P 500 index, it has to meet the following requirements:
- The market capitalisation must be equal to or greater than 4000 million dollars.
- The relationship between market capitalisation and the annual amount negotiated in dollars must be greater than 1.
- The volume of shares traded per month must be at least 250,000 shares per month in the 6 months prior to the valuation date.
Below you will see a table with the 'top ten' of SP500 companies in terms of volume. The S&P 500 list is subject to change and is valid as of the date of this publication (09/27/2019. Source: Infobolsa).
41 182 228
37 582 800
37 248 173
BANK OF AMERICA
33 225 011
26 557 515
23 744 441
COMCAST CL A
22 577 893
20 264 362
20 049 707
19 347 018
Are you ready to have your say on all these instruments and more? Then start trading the SP500 by clicking the banner below!
The S&P 500 and the US economy
Looking at the general economy of the US, we can see it is in a strong position, as its main sectors continue to climb.
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.
Lower interest rates in the US
The Federal Reserve, at its meetings on September 18 and October 30, 2019, agreed to cut the reference interest rates for the third time that year, although this measure had already been discounted by the market.
The drop in rates approved by the Fed in July, the first since 2008, made a dent in the evolution of the performance of US Treasuries in 10 years. This has registered its lowest level since September 2017 with a profitability close to 2% and its levels will continue to fall as long as the dollar remains in the spotlight of the US-China trade conflict.
This is also influencing the evolution of dollar prices, which reached lows at the end of June. Shelter markets such as gold, yen or raw materials are benefiting from this scenario.
Macroeconomic indicators in the US
The current situation of macroeconomic indicators has a general growth bias and that gives strength to the American economy, which will likely continue to grow with some stability, although the negative side is that clear deceleration observed in the last weeks.
The US economy grew by an annualised 2.1% in Q3/2019, unchanged from the second quarter estimate and following a 2% expansion in the previous three-month period. The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, residential investment, exports, and state and local government spending that were partly offset by negative contributions from non-residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.
Keep in mind that GDP in the US is represented by 2/3 of consumption, so all references that are related to consumption are of vital importance to the US economy and that is where there is a clear slowdown, due to what in the short term, levels should continue to rise, but if things do not change, the trend continues and the US government does not take measures to boost the US economy beyond the short term, then we will see falls sooner that late
SP500 long-term analysis
The SP500 began in October with a bearish bias that began in mid-September, with decreasing highs and lows.
Everything indicates that prices are moving towards secondary supports, although we will have to be attentive to the next events.
However, if we look back and observe the evolution of the index since spring 2008, in the midst of the crisis, we see how the SP500 accumulates a decade of growth. This demonstrates and reflects that the stimulus policies by the Federal Reserve and its injections of liquidity in the economy to promote consumption have worked.
In the graph below we can see a slowdown in the index since December 2018, coinciding with one of the high points of the Chinese-US trade war and the imposition of the first tariffs on Chinese products.
Source: Admiral Markets MT5 Supreme Edition - Monthly chart SP500 - Data range: September 2007 to October 2019 - Held on October 4, 2019. Please note that past performance does not indicate future results.
The Mini Terminal of the MetaTrader Supreme Edition shows us the following:
- Positive trend
- Negative boost
- Positive force
Despite signs of a slowdown last summer, these all support the SP500's recent all time highs of 3365.12 in February 2020.
However, if the general context of economic slowdown continues and Donald Trump persists in his trade crusade, with new tariffs on European countries, the change in trend could be confirmed and perhaps the SP500 will put an end to a decade of increases.
Why trade the SP500?
There are both advantages and disadvantages to trading the SP500. The advantages include:
- Never miss a trading opportunity. The US stock market opens at a fixed time and closes at a fixed time. Therefore, the session is extended throughout the trading hours in real time on our MT4 or MT5 Supreme Edition platform.
- You can benefit from the movements in the opening of the market, around the opening gaps and market ranges.
- You can benefit from a competitive spread to achieve better results in your positions in the S & P500.
- SP500 trading gives you access to a financial product related to the economy and news of US companies, allowing stock market enthusiasts to easily and quickly intervene in the US market index.
However, there are some disadvantages. These include:
- Gaps can be a disadvantage for some traders and real opportunities for others.
- Leverage. This ability to speculate with large quantities is double-edged, so leverage can be a disadvantage when used incorrectly.
Trading the SP500 CFD
Both scalpers and the day traders in the SP500 are looking to get results quickly. If this is your situation, read on.
Scalping the SP500
How can you scalp using CFDs on the SP500 index?
- Choose a short time unit (1 minute, 5 minutes)
- Wait for the price to reach an interesting level (support, resistance, pivot point ...)
- Open a position to try to gain some points of rise or fall.
- Close this position in profit or loss quickly
This approach requires discipline, responsiveness and experience. It is also important to pay attention to the SP500 trading schedule, for example:
- The opening of the New York Stock Exchange.
- The dates on which the economic data of the United States are published.
To learn how to open and close a trade using MetaTrader, just see the video below. Note that you will need a trading account and the MetaTrader trading platform. After that, simply follow the guide below!
SP500 day trading strategy
Source: SP500 CFD, graphic M5, MT5 Admiral Markets. July 2, 2019. Remember that past performance is not a reliable indicator of future performance.
Time unit: 5 minutes
- Heiken Ashi
- 2 exponential moving averages (8 and 50 periods)
Schedule: Based on the US session schedule. From 15:30 or 16:30, time of the trading platform.
Purchase position: Near a blue Heiken Ashi candle preceded by a red Heiken Ashi candle, when the moving average 8 is above the 50 period moving average.
Selling position: Near a red Heiken Ashi candle preceded by a blue Heiken Ashi candle, when Moving Average 8 is below the 50-period moving average.
You can test this type of signals with the averages that suit you, according to your personal approach and the responsiveness of the signals you are looking for.
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.
Swing trading the S&P 500 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, with daily and weekly charts.
So no matter what your profile and how you operate, the SP 500 CFD can be an instrument of choice to add to your portfolio, either to diversify or participate in the movements of this important stock index.
Regardless of your trading strategy, though, before you can trade you'll need a platform to trade on. The good news is that you can download the world's most popular trading platform - MetaTrader 5 - absolutely free! Just click the banner below to learn more.
What are the best times to trade the SP500 CFD?
- From 4:30 p.m. to 11 p.m. ( MetaTrader platform time )
- When the US session begins, Asian markets have already been closed for about two hours, but in Europe it is still daylight and European trading sessions are not yet closed. The most important volumes are exchanged at that time!
- Once the activity in the US markets ends, there is a drop around 22:00, until the opening of the Asian markets.
However, beyond those general rules, the US economic calendar has a range of frequent announcements and news releases, which influences the SP500's price.
That is why many S&P 500 traders love to trade based on the economic calendar. This allows operating for only a few minutes around the hours of publications, which sometimes triggers wide movements!
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.
Currently we see the VIX levels around 16.30 (as of October 1) which reflects apathy in the market, low volatility. It is below danger levels and also below average levels, so also general peace of mind.
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 favor 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.
How to trade the SP500 using MetaTrader
First, you must download and install MetaTrader. Once you have opened the platform on your computer, if the S&P 500 stock index does not appear in the MetaTrader by default you must add it by following the steps below:
- Open the "Market Watch" window
- Press the right mouse button on it
- Select the "Symbols" option
- In the search engine, enter SP500
- Press the SP500 symbol
- Press the "show symbol" button and then Accept
- Right click SP500 in the Market Watch window and click "chart window" in the menu
You can also learn about the different sections of the MetaTrader platform in this video walkthrough:
Why trade the SP500 with Admiral Markets?
While there are a range of brokers you can use to trade the S&P 500 stock index, here are just a few reasons to consider Admiral Markets:
- Admiral Markets is an authorised broker and regulated by the FCA (Financial Conduct Authority) of England.
- Admiral Markets spreads are very competitive: you can operate the SP500 with a typical 0.4 point spread.
- Beyond the SP500, Admiral Markets offers trading on a wide range of assets: trading CFDs in Forex, indices, stocks, raw materials.
- Admiral Markets offers the world's best trading platforms (MetaTrader 4 and 5), adapted to all operating systems.
- Admiral Markets has a negative balance protection policy.
- Admiral Markets offers very attractive trading conditions: there is no minimum stop loss, no repopulations, ultra fast order execution.
If you want to practice your strategies with the SP500 you can open a free demo account by clicking on the banner below:
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.