Australia 200 Trading Guide: How to Trade the ASX 200

Market indices are benchmarks reflecting the collective stock performance of a particular market segment within an economy. This presents an opportunity for traders to potentially capitalise on the rise and fall of indices price movement.

In this article, you will learn how to trade the foremost index used to gauge the performance of the Australian Stock Market and the broader Australian economy.

Main Points:

• The Australia 200 index, commonly referred to as ASX 200, is the main index of the Australian stock market.
• The value of the ASX 200 index is based on three methodologies: market capitalisation, float adjustment and an index divisor.
• Factors influencing the value of S&P/ASX 200 are company earning reports, the Reserve Bank of Australia (RBA), commodity prices, etc.
• CFDs provide an accessible and flexible means to gain exposure to the price movement of the ASX 200 index.

What Is the Australia 200 (ASX 200)?

The Australia 200 index (S&P/ASX 200) stands as the premier index of the Australian Securities Exchange (ASX) in Sydney, one of the major financial centres in the world.

The index is designed to track the performance of the 200 largest eligible stocks on the Australian Stock Exchange based on their float-adjusted market capitalisation. This approach ensures that the index effectively captures the collective performance of the most influential companies in Australia.

As Australia's most widely used stock market index, the ASX 200 holds significant importance for traders, investors, and financial institutions alike because it serves as a fundamental gauge of the Australian stock market's performance and the Australian economy.

How Is the Australia 200 Index Calculated?

The methodology used to calculate the ASX 200 provides insights into the function of the index and it is based on three concepts which are:

1. Market Capitalisation

Market Capitalisation The ASX 200 operates as a market-capped-weighted index. Being a cap-weighted index implies that each company's contribution to the index is proportional to its total market value. This value is calculated by multiplying the previous day's closing price of each company's shares by the total number of shares available for public trading.

2. Float Adjustment

Secondly, the ASX 200 is float-adjusted, meaning it operates as a market cap-weighted index with adjustments made for the proportion of shares available for public trading. In other words, the contribution of each stock to the index is relative to its value at the time of issuance. Therefore, companies with larger market capitalisations exert greater influence over the index's price movements.

3. Index Divisor

Although ASX 200 takes into consideration the total market capitalisation of its constituent stocks, however, the performance of the index primarily reflects changes in share prices rather than changes in market capitalisation. Therefore, to ensure the continuity and integrity of the index, an index divisor is used to account for external factors that could otherwise disrupt its integrity. One such factor is changes in market capitalisation resulting from share issuances or stock splits. Without the index divisor, these external factors could distort the index's performance over time.

What Impacts the Market Performance of the ASX 200 Index?

Major factors impacting the performance of the Australia 200 index are:

1. Economic Events

The performance of the ASX 200 index is susceptible to global economic events like the financial crisis of 2008 and the coronavirus pandemic of 2020. In addition, trade tariffs and geopolitical tensions can impact the index's performance due to Australia's economic dependence on commodity exports.

2. News Reports

News headlines, particularly those that affect the Australian economy can swiftly impact the ASX 200 index. Monitoring the Australian economic calendars for medium to high-impact news releases like Gross domestic product (GDP) and employment data can provide insights into the potential price direction of the index.

3. Earnings Reports

The earnings reports of individual companies within the ASX 200 can directly impact the index's performance. Since the ASX 200 is market-cap-weighted, larger companies' positive earnings reports can appreciate the index's value, while disappointing reports may cause the index to decline.

4. Interest Rate Decisions

Decisions regarding fiscal and monetary policies by the Reserve Bank of Australia (RBA) can trigger fluctuations in the ASX 200 index. The Reserve Bank of Australia may raise interest rates as an effective measure against inflation. Changes in interest rates also influence borrowing costs, earnings growth, and investor behaviour, which can lead to increases or declines in stock prices and affect the performance of the ASX 200 index.

5. Strength of AUD

The strength of the Australian dollar relative to other currencies can influence the ASX 200's performance. A stronger AUD can boost the revenues of multinational companies listed on the index, leading to potential increases in its value. Conversely, a weaker AUD may result in decreased revenues and a corresponding decline in the value of the index.

6. Price of Commodities

Given Australia's economic reliance on commodity exports such as gold and copper, the prices of commodities can influence relevant stocks within the ASX 200 index and affect the index's overall value.

How to Trade the ASX 200 CFD

Trading the ASX 200 Index through contracts for differences (CFDs) offers traders a flexible and accessible way to gain exposure to the price movement of the Australian premier stock index.

• Understanding ASX 200 CFDs

ASX 200 is the CFD derivative of the S&P/ASX 200 index futures. Its ticker symbol is represented as ASX 200 (SPI 200). With this financial instrument, traders can speculate on the price movements of S&P/ASX 200 without dealing with the futures market. When trading ASX 200 CFDs, you're essentially speculating on the difference between the opening and closing price of the trade.

• ASX 200 CFDs Long and Short Positions

With ASX 200 CFDs, you have the flexibility to take both long and short positions. A long position involves buying ASX 200 CFDs in anticipation of the index's price increases, while a short position involves selling ASX 200 CFDs with the expectation of the index's price decreasing. This versatility allows traders to profit or loss from both bullish and bearish market conditions.

• Leverage and Margin Trading

CFDs offer traders the ability to trade on leverage, which means that you can open positions with only a small percentage of your total account balance. Since the use of leverage can amplify profits as it magnifies potential losses, it is essential to use leverage carefully and be aware of the risk involved in trading ASX 200 CFDs.

Australia 200 Index (ASX 200) Market Trading Hour

The ASX 200 operates within the trading schedule of the Australian Securities Exchange, adhering to the traditional Monday-to-Friday routine from 10:00 AM until 4:00 PM (GMT+10:00).

For those involved in trading ASX 200 CFDs with Plus500, access to ASX 200 market extends beyond the conventional trading hours. The ASX 200 CFD market, characterised by its round-the-clock availability, ensures that traders can speculate on price movements across different time zones.

Whether utilising the Plus500 app or WebTrader platform, traders can monitor ASX 200 CFDs' price movement on the Plus500 website.

Please keep in mind that trading hours and choice of instruments are subject to individual operators.

What Are the Potential Benefits of Trading S&P/ASX 200?

• Risk Diversification

Engaging in ASX 200 trading eliminates the overwhelming effort to keep up with 200 individual stocks. The ASX 200 provides instant exposure to a diversified basket of Australian shares. This reduces the effort and risk of focusing on individual stocks because poor performance by one company can be offset by the gains of another.

• Long-term Trend Potential

The ASX 200 index is ideal for long-term trends due to its quarterly rebalancing. This periodic adjustment ensures that new best-performing companies are included in the index, potentially strengthening the value of the index.

• Liquidity

The ASX 200 is a highly liquid market with consistent trading volumes. This translates to frequent trading opportunities and swift entry (and exit) into trading positions.

What Are the Drawbacks of Trading ASX 200?

The ASX 200, although very diverse, has a significant weighting towards the financial sector. This can be less than ideal for traders and investors seeking a well-rounded spread across different sectors.

Companies with the largest market capitalisations exert the most influence on the index’s performance. Therefore, a downturn in the profitability of these major companies can negatively impact the overall index performance.

Active traders may find frequent trading opportunities due to ASX 200 inherent volatility. However, volatility may not be suitable for risk-averse traders.

Trading ASX 200 CFDs allows for leverage, which can magnify your profits but you may lose most of your capital if the market moves against your positions.

Guidelines to Trading ASX 200 CFDs

Define Your Trading Style: There's no one-size-fits-all approach to trading the ASX 200 index. You can identify a style that aligns with your personality and objectives. Popular trading strategies include day trading and swing trading.

Use Technical Analysis: Technical analysis involves the combination of chart analysis and indicators to identify trading opportunities. ASX200 price charts offer valuable historical data to analyse past market movements and anticipate potential future trends.

Stay Informed: The ASX200 market reacts to relevant news that can impact the index performance. Hence, it is important to keep up with economic news, company earnings reports, interest rate changes, and other major events. Utilising trading alerts can keep you informed with real-time notifications about key events on your devices.

Practice Makes Perfect: Consider using a demo account to test and practise your trading strategies on the ASX 200 market before risking real capital.

Dollar-Cost Averaging: For risk-averse long-term traders who might not be comfortable with the everyday fluctuations of the index, you may consider buying a fixed amount at regular intervals if you anticipate a bullish trend or you may sell a fixed amount at regular intervals if you anticipate a bearish trend. While DCA may yield lower returns over the long term, it also reduces risk.

Steps to Buy and Sell ASX 200 CFDs With Plus500

Here are six (6) steps to start trading the ASX 200 CFDs:

1. Sign up for a trading account: Choosing a reputable broker like Plus500 is crucial. You can open a trading account (demo or live) to begin trading the ASX 200 index.


2. Login to Explore the Trading platform: After signing up, you can access the Plus500 app or WebTrader platform. The platforms are useful for analysing historical charts, setting up trading alerts, executing trades etc.


3. Find the ASX 200 CFD Instrument: Within the platform, users can navigate to the instrument category section or use the search bar to locate the ASX 200 CFD instrument.


4. Analyse the ASX 200 Market Conditions: Before entering a trade, it's crucial to analyse the current market conditions of the ASX 200 index. Traders may use technical analysis tools, such as charts and indicators, as well as fundamental analysis to make informed decisions.


5. Adjust Your Risk Management Parameters: These are important order types that help to minimise the exposure of your overall capital to market risk. They include position sizing, stop-loss orders (close at loss), take-profit orders (close at profit), trailing stop orders etc.


6. Confirm and Monitor the Trade: Once all parameters are set, you can click "Buy" if you anticipate the ASX 200 price to rise (going long) or "Sell" if you expect it to fall (going short). After confirming a buy or sell position, you can monitor the trade or adjust your trading strategy accordingly.



Why Trade the ASX 200 CFDs With Plus500

• Advanced Trading Tools: A comprehensive suite of charting tools, technical indicators, and economic calendars is available on the Plus500 trading platforms to help you make informed trading decisions.


• Competitive Spreads: You can enjoy Plus500 competitive spreads when trading the ASX 200 market.


• Flexibility: Plus500 trading platforms provide convenience and accessibility to trade ASX 200 CFDs on desktop, iOS, or Android devices.


• Fast & Reliable Execution: With Plus500 you can swiftly enter and exit trades on ASX 200 CFDs at market available prices.


• Leverage: Plus500 provides leverage to amplify potential profits however can also amplify losses.


• Trading Instruments: You are not limited to trading only ASX 200 CFDs. Plus500 provides a diverse range of major indices like the Dow Jones Industrial Average, S&P 500, FTSE 100, and shares of leading companies in Australia and worldwide.



Conclusion

Trading the ASX 200 index through contracts for difference (CFDs) provides traders with the flexibility to gain exposure to the performance of the Australian premiere stock index (ASX 200).
This article provides a comprehensive guide on how to trade the ASX 200 by covering various aspects of the index from its calculation methods to its benefits and drawbacks. Equipped with the guidelines discussed such as defining your trading style, technical analysis, and staying abreast of market news, traders can make well-informed trading decisions to experience more benefits than drawbacks.

Frequently Asked Questions (FAQs):

What Strategy Is the Most Suitable for Trading the ASX 200?

The Australian stock market (represented by the S&P/ASX 200) has shown a historical upward trend over the past three decades. This could suggest that a trend-following strategy, which focuses on buying appreciating assets or vice versa, might be suitable.

How Does the ASX 200 Respond to Crisis?

The Australian Securities Exchange (ASX) suggests that the S&P/ASX 200 index tends to deliver strong returns in the year following a major economic crisis. A recent example is the 2021 strong return after the coronavirus pandemic. Although past performance does not guarantee future results.

How Does China's Economy Affect the ASX 200 Index?

Since China is Australia's largest trade partner, China's economic performance often leads to an increase or decrease in the prices of Australian stocks and thus impacts the ASX 200 index performance.