By James Woolley
Many traders in the UK have been drawn to the FTSE 100 index over the years, but very few people manage to make consistent profits trading it. So what are the reasons why so many people end up losing money?
Well I think the main reason is because there are several factors that affect the movement of this index, and many of these are almost impossible to predict. For a start you often have economic data being released early in the day, which can often have a dramatic effect on the movement of this index.
You will also find that later in the day the FTSE 100 will basically just follow the Dow Jones. If the Dow Jones starts moving strongly higher, then the FTSE 100 will almost certainly do exactly the same. It’s sad to see our main index mimicking the Dow Jones in this way, but it happens every single day. The only time it will move independently is in the first half of the day, ie when the American markets are closed, but even then you will often find that this index will follow the Dow futures.
Also because of this you often get sudden price spikes in this index when there are any significant economic data announcements coming out of America. The more important announcements will often have a major impact on the US markets (or the futures if they occur before the market opens) and therefore the FTSE will respond accordingly. This makes it very hard to predict where the market is heading in the immediate future.
Another reason why this index is so difficult to trade is because apart from all the external influences, it is also very unpredictable. Some days it may move 100 points and be very easy to trade, whilst other days it may trade in a very narrow range of say 30 points, and hardly move at all during the day. Plus when you factor in the spread, which can be two or three points, it is not at all easy.
The same applies when you trade early morning breakouts. This is often the best way to trade this index, but even then there will often be times when the index is very indecisive and there are a lot of false trading signals.
So overall it is easy to see why many people who attempt to trade the FTSE 100 index often end up losing money in the long run. In general most people find that it is a lot easier to trade individual shares or the forex markets.
Click here to learn how to trade FTSE 100, and to read about some of the best FTSE 100 dividend stocks for 2011.