Trading The FTSE

UK stock traders of all experience levels should have a good understanding of the FTSE. Knowledge about how the FTSE index works will help inform decisions about which shares to buy and whether to invest in tracker funds. This guide will provide you with all the information you need to start trading the FTSE. Our report also includes a brief history lesson, a breakdown of the different indexes and their purposes, plus trading preparation tips.

The FTSE Explained

The FTSE (pronounced ‘footsie’) is the main UK stock exchange consisting of 600+ companies across 50 countries. It’s the largest exchange in Europe and operates as a key reference point for other global markets. Each index, detailed further below, ranks the top publicly traded companies registered in the UK by market capitalisation.

Our timeline highlights critical moments in its history:

• 1973 – Regional exchanges merge to become the Stock Exchange of Great Britain and Ireland, later renamed as the LSE, which stands for London Stock Exchange
• 1984 – FTSE 100 is launched with a market value of £160 billion and an index level of 1,000
• 1987 – On 20th October the market falls 12.22% in one day. This largest one-day percentage drop in the FTSE’s history is known as ‘Black Monday’
• 1992 – FTSE 250 is launched with a market value of £98 billion
• 1999 – The FTSE’s highest point of the 20th century is reached on 31st December owing to the dot-com boom
• 2009 – On the 5th March, the FTSE falls to the lowest value since opening at 3,529.86 and closed at a high of 3,530.73
• 2017 – On the 29th December, the FTSE reached the highest-ever closing and a record all-time high intra-value at 7,687.77 and 7,697.62 respectively

FTSE Indexes

• FTSE 100 – The FTSE 100 is a leading global index and its stocks and shares are the most popular to buy. It is composed of the top 100 companies in the UK, ranked by market cap. The top 50 FTSE constituents come from many different sectors, for example, leading energy and oil companies like BP and mining companies like Glencore. There are several property businesses and banks in the top 100 list also.
• FTSE 250 – This index comprises the next largest 250 companies. FTSE 250 companies tend to trade less internationally and therefore the index’s performance is a better reflection of the UK economy.
• FTSE 350 – The FTSE 350 is a weighted index of the companies included in the FTSE 100 and 250. It, therefore, includes a list of the top 350 companies in the UK on the London Stock Exchange.
• FTSE Small Cap – This index is a collection of small-cap companies ranking from 351st to 619th on the LSE sorted by market cap.
• FTSE Aim All-Share – A weighted index with approximately 600 constituents out of 2,000 LSE listed companies. It is managed by FTSE Russel a subsidiary of the LSE. The FTSE Aim All-Share index tends to track closely to the FTSE 100 and often follows similar chart trends.

FTSE Russell also provides other indices, which are split by region and sector. A fact sheet for each can be found on their website.

To be listed by the FTSE Group, companies must adhere to specific conditions. These include having a full London Stock Exchange listing and providing proof of nationality, liquidity, and free-floating status.

Key Components Of FTSE Indexes

Weighting

All companies are weighted by market capitalisation in each index. Companies with a large market cap will influence the index more significantly than smaller companies. Market cap is calculated by the number of tradable shares multiplied by the share price.

To calculate the number of tradable shares, the total number of shares is multiplied by the free float adjustment factor. The free float adjustment factor is the percentage of tradable shares as a proportion of total shares (rounded to the nearest 5%). Any restricted stock such as shares held by employees is excluded.

Changes

FTSE Russell carry out a quarterly review of the list of companies in each FTSE index and their market cap ranking. The review dates are the Wednesday after the first Friday of each quarter. Each company’s valuation is based on the close market cap value of the night before the review. Based on this valuation, all companies are listed in league tables. The biggest market cap risers will be promoted, and the greatest fallers will be relegated.

Only companies in the top 90 can be promoted and any company lower than 111th will be relegated. It can therefore be expected that the top FTSE 250 risers will be included in the FTSE 100 the following quarter, similarly, the top FTSE 100 fallers may be included in the FTSE 250 index. All FTSE index changes are made by independent market experts.

There are many reasons why a FTSE 100 company’s value may change, often reflected in a change in share price. The most common reasons are mergers and acquisitions, responses to news stories, and consumer trends.

Purpose Of The FTSE

The FTSE 100 is most widely used as a UK stock market indicator. Despite this, many of the companies in the top 100 list are internationally focused meaning the index’s price, chart and forecast may not truly reflect the UK’s economic performance. It is impacted by international events, for example, falling 5.7% after the 9/11 attacks in New York.

The FTSE 250, 350, and All Share act in a similar fashion but may be less affected by international events due to increased domestic trade.

Many traders try to capitalise on FTSE index price movements by anticipating changes in market sentiment. This can be achieved by using a tracker. The index can be either ‘up’ or ‘down’. When there are more buyers than sellers the index is up, while when the reverse occurs, the index is down. These movements occur in real-time with live charts refreshing every 15 seconds during market hours.

The market opens at 08:00 and the close time is 16:30. The close value is taken at 16.35. (All times in UK Local time – GMT in winter, BST in summer)

How To Start FTSE Trading

Nowadays, many FTSE 100 investors are using day trading strategies to make money. Earnings can also be made by developing a system that focuses on the FTSE over a longer period. Regardless of your preferred method of trading, be sure to review our top tips for FTSE trading:

1. Select A Broker

A broker is a trader’s main route to market. Therefore, it is important to make the right choice. The key things to consider are:

• Trading platform – Platforms available vary by broker, some are more comprehensive than others. Traders must understand the platform they are using and get the most out of the tools available for technical analysis. Some platforms offer multi-screen displays where traders can analyse different indexes, for example, comparing a FTSE All-Share Index chart vs a live FTSE 100 or 250 chart.
• Fees applicable – There are fees applicable when trading, including commissions, deposit and withdrawal fees, plus transaction fees. When trading in high volumes these fees can add up and erode profits.
• Customer service – Trading can be confusing and having strong customer service support is important, especially if something goes wrong. Most brokers now offer a range of customer options during trading hours, from live chatbots to email and telephone.
• Additional features – The best brokers offer additional tools to improve the trading experience. Whilst this is not essential for FTSE trading, features such as a forum, live market news, and daily chart update notifications are a bonus.
• Compare brokers – Reviews are a great source of information when choosing a broker in a competitive market. Reviews can provide clear and concise details which might not be transparent on the broker’s website. For broker recommendations, review our broker list.

2. Fund Your Account

Before you can start trading the FTSE you will need to fund your new account. Over time, brokers have increased the number of payment options, some now accept Bitcoin payments, for example. Make sure you have enough funds in your account to execute trades, not forgetting fees.

3. Choose Your Asset

All FTSE shares have different characteristics, with over 2,000 to choose from it would be impossible to have an understanding of them all. Despite this, all FTSE stocks share two common qualities: volume and volatility.

Volume

Volume is the number of shares being traded at a specific time. If a FTSE chart increases by 100 transactions today and decreases by 50 tomorrow, the total volume over the 2 days would be 50. The size of a market move is relative to the current trading volume. As a result, volume can be used as a quality factor to measure the size of a move. For example, a transaction of 1,000 FTSE 100 shares may not show a spike on a live chart due to the number of shares in that period, but a transaction of the same size for a FTSE Small Cap company may have a bigger impact.

Making use of a stock screener is essential, here traders will be able to pick stocks that align with their methodology by comparing volume, price, and other important factors. Popular stock screeners include Yahoo Finance, TradingView, or MarketWatch. Alternatively, most FTSE brokers offer a regular report on the top 10 stocks being traded as well as the biggest FTSE 100, 250 and 350 risers and fallers.

Volatility

Volatility is the rate of risk and a measure of unpredictability that a share price can experience over a period. If the price fluctuates in large swings it is considered to be highly volatile, while if the price does not fluctuate, it is considered to be stable. A trader’s appetite for volatility in the FTSE will inform their trading strategy, for example, a day trader would welcome volatile price movements whereas a position trader may wish for steady and stable movements over a longer period.

Traders may wish to use the beta value of a stock which indicates how volatile or risky a stock is compared to the market. The market beta is 1, any company with a beta above 1 is more volatile than the market and anything below is less volatile than the market.

Traders with a good grasp of trading volumes and volatility will have a solid foundation to start trading. However, before you do enter the market ensure you read our preparation guide below.

FTSE Trading Preparation

There are winners and losers in all financial markets trading. To give yourself the best chance at returning profit it is essential to prepare properly.

Wake Up Early

Starting your day right is key. The FTSE opening time is 08:00 GMT so be sure to give yourself enough time in the morning to wake up properly, grab a coffee, and check for overnight updates.

Read The News

All FTSE indexes are sensitive to news stories, whether that be financial market news (for example on Bloomberg News) or otherwise. News of new entrants or listings may also influence price movements.

The FTSE 100 will be impacted by major world events whereas the FTSE 250 and 350 may be more impacted by domestic issues. Make sure you’ve read the latest stories and thought about how this might affect your live FTSE trades. This may also allow you to set up a move as soon as the market opens off the back of that news.

A good example of this is the impact of Brexit on the FTSE value. The result of the Brexit vote was known on the night of the 23rd June 2016. When the market opened on 24th June the FTSE fell from 6,338.10 to 6,138.69. Well-prepared traders would have opened short positions on the FTSE to capitalise on this update.

Analyse Market Data

There are many different trading strategies that you can implement, some are FTSE specific and others can be adapted to other asset types like indices, futures, and options. Many traders investing in FTSE 100 or 250 companies use historical data or values to make future price predictions. This combined with chart, growth, and trend analysis can form the foundations of a good trading strategy.

Of course, there is no guarantee that the stock price rise last week will forecast gains the next week. A famous quote known in the investing world explained: “Past performance is no guarantee of future results”.

Set Up Your Charts

As discussed above, using charts are a key aspect of FTSE trading. Most platforms offer several customisable charts. This includes short-term charts such as 1 and 5-minute charts or charts which focus on the long-term. A FTSE chart with a longer time frame will provide an overview of market sentiment and a high-level summary of how a share is currently trending.

Traders may wish to implement specific trading strategies by drawing support and a resistance line on the graph. This will allow traders to judge at what price they want to enter or exit the market.

Alternatively, some platforms will offer automated FTSE trading which lowers the level of attention needed. A good example of this is a FTSE 100 day trading robot.

Start Trading

Once you have your charts set up and are comfortable with your strategy, you are ready to trade. Depending on your investing strategy, you should be able to identify when the market confirms your predictions. If you are day trading the FTSE, there may only be seconds between entering at a desired live price and missing the right rate, so you need to be ready. Longer-term investors like position traders may have to be patient for their share to hit the execute price. Regardless of your trading strategy, all investing should have an element of risk management.

Additional Tips

In addition to the steps above, FTSE traders can also do the following to capitalise on gainers and fallers:

• Use FTSE forums and chat rooms to share trading ideas of future movers
• Traders can order ebooks or download to PDF to increase knowledge of the financial markets
• Watch online trading videos or enroll in courses. There are lots of FTSE educational materials that help traders cover topics such as how to read an index graph and how to review a dividend yield calculation to make a move.

Final Word On FTSE Trading

The outlook for the FTSE is hopeful. In the last 12 months, global financial markets have been hit hard by the Covid-19 pandemic, however, there is an expectation that the FTSE and other indexes will soon return to similar levels. The FTSE rankings will continue to change and there remains a good opportunity for traders to realise profits by following our guidance and making use of trading strategies and resources.

FAQ