Indices are either region based or sector based and serve as an excellent indicators for the prevailing market sentiment. Since, however, in our days local economies are strongly intertwined, it is no surprise that indices tend to be highly correlated.
The correlation between global economic events and the price patterns of major indices is a key understanding for traders who want to participate in the fascinating indices markets. You may, for example, know where the DAX is currently trading and whether it opened lower or with a bullish gap, but what does that mean for you as a trader and how can you capitalize on the opportunities lying behind the numbers?
The most important information about an index, often provided alongside its current price, is the daily change (as a percentage) and the number of points that it has moved up or down since market open.
Let’s take the DAX for example. If you think that the economic outlook for Germany is positive, you would buy DAX CFDs in the expectation that companies in Germany would pull the price of the index up.
It is important to remember that at times indices may rise not as a result of real economic growth, but simply due to increased risk appetite to own risky assets, like shares. These deviations, however, cannot last long and a price correction is likely to follow soon. Traders often compare the performance of indices from different regions in order to spot and take advantage of opportunities. Let’s find out how that works in practice by comparing DAX and S&P500.
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