S&P Trading Strategy – The 3 Bar Strategy (2024)

S&P Trading Strategy – The 3 Bar Strategy (1)

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Learn the S&P 500 trading strategy and speculate on the price movement of the world’s largest and most important stock market indices. Most institutional investors and big hedge funds love trading S&P 500 index. If you too love trading stock indices, you need to learn our S&P 500 trading system.

Many investors use the S&P 500 indexas a proxy to view the US stock market performance. More, due to the Intermarket correlation any sudden S&P 500 price movement can have a ripple effect across other markets, including the forex market, commodity market, future market, and even in the cryptocurrency market.

So, just because you’re a pro-Forex trader or an oil trader, that doesn’t mean you should only focus on the Forex market. However, you still need a profitable trading strategy for the S&P 500 if you want to track and forecast future price movements in the US stock indices.

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Moving on…

Let’s get started by explaining what the S&P 500 index is, and how to trade S&P 500 index, and we’re going to finish with our proprietary S&P 500 trading strategy.

Table of Contents

What Is S&P 500 Trading?

S&P Trading Strategy – The 3 Bar Strategy (2)

The S&P 500 is a US stock market index that tracks the performance of the 500 largest US stocks. In other words, the S&P 500 index value is simply the total market value of the 500 large-cap US companies listed on the NYSE and NASDAQ.

The percentage change in the US index value between two days is the index return.

Generally speaking, a stock market index (S&P 500, Dow Jones, NASDAQ) will give us information about a group of stocks. Unlike other stock indices, the S&P index includes stocks from all sectors of the US economy.

Therefore, the S&P 500 index is the most traded stock index in the world because institutional investors believe it to offer the best representation of the US stock market.

Moving on…

Let’s see what makes index trading different and what are some of the advantages of S&P 500 trading.

See below:

Why trade S&P 500 Index?

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Off the bat, you need to know that the S&P index moves a lot. In other words, the S&P 500 volatility is high. In the stock market, we have something called the VIX, which measures the implied volatility (expectation of future volatility) of the S&P 500 Index options.

For those of you who don’t know what VIX trading is, we have you covered, just check our guide How to Trade VIX Strategies– Wall Street’s Fear Index.

And, higher S&P trading volatility means more trading opportunities for you.

You’re going to have price movements that are above and beyond what you see in the Forex currency market.

Secondly, trading the S&P 500 will give you diversified exposure to the entire US stock market. Rather than simply owning one single stock that may or may not perform well, the S&P 500 index will give you exposure to 500 large-cap US companies.

Your performance won’t be tight to the performance of one single stock, so you can increase the chances of making a profit.

If you want to trade the US stock indices you need to know when is the best time to trade the S&P 500. In other words, we’ll examine what are the most volatile S&P 500 trading hours.

See below:

When to trade the S&P 500 Trading Strategy?

The best time to trade the S&P 500 index is when the US session begins because that’s when the trading volume is the highest.

The US-day trading futures market opens at 9:30 US EST.

Like with every market, the S&P 500 price vibrates in its own unique way.

If you’re a day trader, you might wonder:

When is the best time to trade S&P 500?

Let’s explore the answer to this question.

The best times to trade SPX is during the hours of the highest volume:

  • Between 9:30 AM – 11:00 AM EST, the US stock market officially opens which overlaps with the last 1.5 hours of European trading.
  • Between 2:00 PM – 4:00 PM EST before the stock market close the professional trading activity increases again.

Usually, those are the most liquid hour of SPX trading. As a “consequence” of higher liquidity, the S&P 500 buy and sell spreads are much tighter during this time window.

To verify is this is true, check out the 15-minute chart with an 8-period ATR (Average True Range). This will measure the average range of a 2-hour period.

S&P Trading Strategy – The 3 Bar Strategy (4)

The above S&P 500 chart highlights that the most trading activity takes place at the open.

Moving on…

We must ensure that we use the best S&P 500 trading platform.

See below:

What’s the best S&P 500 Trading Platform?

In this section, we’re going to reveal what is the best futures trading strategies software platform.

First, it’s important to know that you can start trading S&P 500 index with multiple financial products like:

  • Futures.
  • Options.
  • Exchange-Traded Funds (ETFs).
  • Investment Funds.
  • Contracts for Difference (CFDs).
  • Spread trading.

So depending on the financial instrument used and your preferred broker you can trade the S&P 500 on the following trading platforms:

  • TradeStation – low commission trading platform.
  • Thinkorswim – best for options trading.
  • E*Trade – most trusted futures trading platform.
  • TD Ameritrade – best desktop platform.
  • Interactive Brokers TWS – best for professional traders.
  • MetaTrader 4 trading strategies, MetaTrader 5 and cTrader – best for retail traders.

Moving on…

Once you have decided which trading platform suits better your trading style, let’s see your guide to trade SP 500.

See below:

How to Trade the S&P 500?

We’re going to outline few trading instructions to keep in mind when trading S&P 500 index.

Even when it seems like the S&P 500 price seems like consolidating, the same level of choppiness you see with Forex trading won’t occur that often with the US stock indices.

Under this circumstance, if you want to learn how to trade the S&P 500 index, you kind of know-how to trade in volatile markets.

If you want to learn more about volatility trading, please check out: Volatility trading strategy – Profit Without Forecasting Price Direction.

You can trade the US indices via:

  • Contracts for Difference (CFDs) which tracks the price movement of the underlying instrument. If the S&P 500 price is going up the CFD contract will rise and vice versa.
  • Exchange-Traded Funds (ETFs) which is even better. The biggest and most heavily traded ETF in the world is the SPDR S&P 500 ETF Trust Fund also known as the SPY.

For small investors, it’s better to trade the S&P 500 index via ETFs or CFDs due to the use of leverage. When trading SPDR S&P 500 ETF, traders can go both long and short. So, you can profit even when the market goes down.

Moving on…

We’re going to share with you our favorite S&P trading strategy.

See below:

S&P 500 Trading Strategy

Having a systematic methodology to trading SPX is of utmost importance.

Over the long run, the S&P 500 index has the tendency to gradually climb and every once in a while we get sharp sell-offs that can lead to stock market recessions. And the process repeats all over again, due to the fractal trading nature of the S&P 500 price.

You can see some examples of this in the S&P 500 chart below:

S&P Trading Strategy – The 3 Bar Strategy (5)

Now, what’s the main takeaway from the above S&P 500 chart?

If your answer is:

“It’s more profitable to buy and hold the S&P 500 index, you’re right.”

Did you know that if you bought the S&P 500 index at the close of each trading session and took profit at the next open, you could have gained 13.3% return in 2019.

See the S&P 500 chart below:

S&P Trading Strategy – The 3 Bar Strategy (6)

Note* This S&P trading strategy would have given you 3 wins and 1 loss if traded over the past 4 trading sessions.

However, this S&P trading strategy doesn’t have any strong backing to suggest it will work in the coming years. That’s why we need to develop an S&P best trading system with more consistency that can work year after year.

So, do you want to learn a simple and timeless way to trade the S&P 500 successfully?

With that in mind here is a profitable S&P trading strategy.

See below:

First, let’s lay down the things needed to trade successfully the S&P trading strategy:

  • 3-period SMA (simple moving average strategy) calculated using the low prices
  • 3-period SMA (simple moving average) calculated using the high prices

See the S&P 500 price chart below:

S&P Trading Strategy – The 3 Bar Strategy (7)

Note* The S&P price will be confined between the 2 moving averages 85% of the time.

Moving on…

Here are the entry and exit rules of the S&P trading system:

  • Buy at the 3-SMA low and exit your trade at the 3-SMA high
  • For selling is the opposite: sell at 3-SMA high and exit your trade at the 3-SMA low
  • The stop loss placement is above/below the 3-SMA low/3-SMA high

Now, to add more confluence for our S&P 500 trading signals, we’re going to add one more element:

We’re only going to buy when we touch the 3-SMA low if both moving averages are stretching to the upside. Check out our blog on multiple moving averages trading strategies.

See the S&P 500 chart below:

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Conversely, we’re only going to sell when we touch the 3-SMA high if both moving averages are stretching to the downside.

See the S&P 500 chart below:

S&P Trading Strategy – The 3 Bar Strategy (9)

As you can tell this S&P 500 trading strategy is a trend following strategy that takes advantage of the small price retracement.

Now…

There are also ways to take advantage of the intraday price movements by using a day trading S&P 500 strategy.

See below:

Tips for Day Trading S&P

If you have a 9 to 5 job, and you only have an hour to trade per day, you can use our day trading S&P 500 strategy. Ideally, the S&P 500 day traders will be trading based on trading strategies that take a short amount of time.

Now, because the market structure is fractal in nature, we can use this same S&P trading strategy for day trading. However, we’re going to add a simple trading trick.

Let’s do an exercise and analyze the S&P 500 chart below.

What’s the first noticeable price behavior that jumps into your eyes?

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If you pay close attention to the price action relationship with the 3-period SMA, you will notice two things:

  • During strong uptrends, the price has the tendency to stay glued to the 3-SMA high
  • During strong downtrends, the price has the tendency to stay glued to the 3-SMA low

With that in mind, we can now develop a very successful day trading S&P strategy. The entry and exit rules are the same, but to avoid the inherent intraday noise we’re only going to use the daily chart as a filter as follows:

When the daily chart shows the price glued to the 3-SMA high, we’re going to switch to the 5-minute time frame (or 15-minute chart) and only take long trades.

See the 5-minute S&P 500 chart below:

S&P Trading Strategy – The 3 Bar Strategy (11)

Remember that you need to exercise discipline and develop a successful daily routine that can fit into your schedule.

Final Words – S&P 500 Trading Strategy

In summary, the S&P 500 trading strategy is a trend-dependent strategy that can ride both bullish markets and bearish markets. If you’re an aspiring trader, you can use our day trading S&P 500 strategy and take advantage of the intraday volatility.

To summarize, the S&P trading strategy has two main advantages:

  • The daily volatility appeals to traders.
  • Broader exposure to the US stock market.

Don’t forget you can always use the S&P trading system with other markets (stocks, commodities, currencies, and cryptocurrencies) just make sure you manage your risk and keep losses at a minimum. Last but not least, protect yourself and use proper a risk management strategy.

Thank you for reading!

Feel free to leave any comments below, we do read them all and will respond.

Up Next…

Stock Index Trading Strategies

Back To Stock Trading Strategies

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S&P Trading Strategy – The 3 Bar Strategy (12)

Free eBook Download!Get A Simple 5-Step Momentum Trading Strategy

As an experienced trader and enthusiast in financial markets, particularly in stock indices like the S&P 500, I've extensively studied and practiced various trading strategies and concepts over the years. My understanding comes from firsthand experience in analyzing market trends, developing trading systems, and adapting to the dynamic nature of global financial markets.

Let's dissect the article on the S&P 500 trading strategy and delve into the key concepts presented:

  1. S&P 500 Index: The S&P 500 is a stock market index comprising the 500 largest publicly traded companies in the United States. It reflects the performance of these companies and is widely regarded as a barometer for the US stock market.

  2. Index Trading: Trading the S&P 500 index involves speculating on its price movements either through direct investment in the index or through financial instruments like futures, options, ETFs, CFDs, etc.

  3. Volatility and Trading Opportunities: The S&P 500 is known for its high volatility, which creates numerous trading opportunities for investors. Volatility is often measured using the VIX (Volatility Index), which gauges market expectations of future volatility.

  4. Diversification: Trading the S&P 500 provides diversified exposure to the US stock market as it encompasses companies from various sectors, offering a broader investment scope compared to individual stocks.

  5. Trading Hours: The article discusses the best times to trade the S&P 500, highlighting periods of high trading volume, such as the opening and closing hours of the US stock market.

  6. Trading Platforms: Various trading platforms are available for trading the S&P 500, including TradeStation, Thinkorswim, E*Trade, TD Ameritrade, Interactive Brokers, MetaTrader, etc. Each platform offers different features and caters to different types of traders.

  7. Trading Strategies: The article presents several trading strategies for the S&P 500, including momentum trading, trend following, and day trading strategies. These strategies involve technical analysis tools such as moving averages, chart patterns, and price action analysis to identify trading opportunities.

  8. Risk Management: Emphasis is placed on the importance of risk management in trading, including the use of stop-loss orders to limit potential losses and proper position sizing to manage risk exposure.

In conclusion, the S&P 500 trading strategy offers traders the opportunity to capitalize on the dynamic movements of the US stock market using a variety of trading instruments and strategies. Success in S&P 500 trading requires a combination of market knowledge, technical analysis skills, and disciplined risk management practices.

S&P Trading Strategy – The 3 Bar Strategy (2024)

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