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What is the FTSE? | AvaTrade Tutorial
Trading FTSE 100
The FTSE 100 (Financial Times Stock Exchange), known better as the Footsie, is possibly the most popular and widely traded index on the stock market in the world today. How? This index trading represents 80% of the market capitalization within the London Stock Exchange (LSE). With a Joint venture the LSE a co-owner along with the Financial Times, and the FTSE is the only index not part of any Stock exchange.
The FTSE 100 is a share index of 100 companies listed on the LSE, weighted by market capitalization, and is managed by the FTSE group, as markets open this index is updated and published every 15 seconds.
The indication of how prosperous United Kingdom’s top companies are, is led by the FTSE index, however a portion of the FTSE 100 is also made up of other global companies, and it is a mistake to use it as the only indicator of the state of the UK’s economy.
FTSE 100 History
The index entered the market on the 3rd of January 1984 at a base level of 1000 points. During the dot-com bubble, in 2000 the index saw levels reaching 7,103.98. There after the index saw a fall during the financial crisis of 2007-2010 to low levels that were below 3,500. Seven years later in March of 2017 the highest intra-day value reached and recorded was 7,777.62.
FTSE 100 Index composition
The companies that make up the FTSE 100 are determined quarterly, and formulated on the basis on their values that are taken after the close of business the night before. Should companies not make a certain grade they will be excluded and replaced with a new constituent that has made the grade.
|Companies||Index weighting (%)|
|Royal Dutch Shell A||5.43%|
|Royal Dutch Shell B||4.89%|
|British American Tobacco||4.77%|
|Reckitt Benckiser Group||2.4%|
Factors that influence the FTSE index price
Even though most of the composites are UK based; news, political, economic shifts etc. that occur in Europe will have a consequence on the index. Most announcements from the UK that do affect the FTSE are events such as: Interest rate announcements, GDP statistics, UK manufacturing numbers and inflation rates that have all to do with The United Kingdom.
While components of the Footsie may be made up of British companies (as mentioned) a lot of the FTSE’s revenue is generated from outside of the UK, such as the example of most economies like to publish their figures in USD ($) instead of the GBP (£). Furthermore, the FTSE has 5 oil trading companies that are listed (BP, BG Group, Royal Dutch Shell, Petrofac and Tullow Oil), and their share values are mostly influenced by events that take place in the middle east. While, 13 of the world’s most popular mining industries are influenced by global events. Changes in the price of the commodity are influenced by all of the markets and the world’s events and this is important to keep in mind when embarking on trading the FTSE.
How Traders Use the FTSE 100
The FTSE 100 was created as a way to provide a snapshot of the performance of the UK stock market. In theory it should also act as a measure of the overall UK economy. However so much of the revenue generated by FTSE 100 companies comes from outside the UK the FTSE 100 is not the best measure of the health of the UK economy.
Instead it can be considered a fairly accurate indication of the health of the global economy. This was best proven in 1987 during the Black Monday event in the U.S. The FTSE 100 suffered its worst one-day percentage decline of 12.22% in response to the economic woes in the U.S. So we can see that global events can have a strong impact on the FTSE 100.
Aside from its use as an indicator of the health of the global economy and the UK stock market the FTSE 100 is also used widely by individuals all across the globe to make a profit from the fluctuations in the market price of the largest companies in the UK. Traders have found that the movements in the FTSE are regular enough that they can be forecast to make a profit as the index rises and falls.
Below you can learn more about how the movements in the FTSE 100 can be traded to potentially generate profits.
FTSE 100 Trading information
- The FTSE 100 futures contract is tradable from 7:01 – 19:59 (GMT), Monday to Friday
- The FTSE moves in increments of 0.50
- The margin requirement for trading the FTSE is usually about 2% (i.e. leverage) with most brokers
- The minimum trade size is 0.1 index
- The currency of the FTSE is the British Pound
Trade the FTSE 100 with AvaTrade
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Trading the FTSE 100 with Leverage
At AvaTrade you are free to trade the FTSE 100 using leverage as high as 100:1 with 1% margin. This is a very good way to attempt to generate better profits without adding an excessive amount of capital to your account. Margin trading with 100:1 leverage allows you to control 100 times as many FTSE 100 contracts and collect the profits or losses on the full amount of the leveraged trade.
For example, you could take a long trade on the FTSE 100 for $5,000. With 100:1 leverage you need just $50 as your margin for this trade. If the trade goes in your favour and the FTSE rises by 1% the profit is $50, which means you have a 100% return on your $50 margin used. If you made a similar trade without using leverage you would first of all need the $5,000 in your trading account, and while your return would still be $50 on a 1% move in the FTSE 100 your profit would also be just 1% of the capital used. As you can see, using leverage is a much more efficient use of your capital.
Note that leveraged trading does come with risks. If the position moves against you, you’ll see the same magnified results, meaning you can quickly lose your entire position, or even be forced to add more capital to satisfy a margin call.
The Benefits of Trading FTSE 100 with Leverage
- Potential for Magnified Profits – It’s well known that trading with leverage gives traders the ability to make much larger trades with a smaller amount of capital. With the 100:1 leverage available when trading the FTSE 100 at AvaTrade it is possible to magnify profits by 100 times. The use of leverage is one of the most effective ways to increase returns without adding more capital.
- Diversification – Because you can use much smaller amounts of your available capital when using leverage, you are also able to diversify your trading by opening multiple positions. This diversification can allow you to use hedging strategies and can effectively reduce market risks.
- Profit from Falling Markets – When using a margin account, you are free to trade both the long and the short side of the market. This allows traders to make profits from markets no matter which direction they are trending.
FTSE 100 Trading Main FAQs
- What is the FTSE 100?
The is the U.K. equivalent of the S&P 500 in the U.S. It is an index that was created by the Financial Times Stock Exchange Group, hence the FTSE or “footsie”, and it is comprised of 100 blue chip stocks listed on the London Stock Exchange. The components of the FTSE 100 represent roughly 80% of the market capitalization of the London Stock Exchange. The index includes the integrated oil & gas companies Royal Dutch Shell and BP, as well as banks HSBC and Barclay’s, and pharmaceutical giants GlaxoSmithKline and AstraZeneca.
- Should I trade the FTSE 100?
As the London Stock Exchange is the most closely watched market in Europe it is well worth it to both follow and trade the FTSE 100. Often the index will follow moves made by the British Pound as well, since roughly 80% of the companies are multi-nationals that benefit from a weak Pound. This can help inform trades and forecast the direction the index will take, It can also be a good choice to trade the FTSE 100 when its major constituents report good news.
- What’s the best strategy to trade the FTSE 100?
The best strategy for trading the FTSE 100 is to first decide what time frame you’ll be trading. Are you looking to scalp the index, day trade, swing trade, or look for position trades? Next is to study the daily and weekly charts to see the long term direction of the market. This will help inform you whether it is wiser to go long or short the market. Finally look for trading signals based on your favorite technical indicators.