How to trade the Hang Seng index

An overview of Hang Seng Index

The Hang Seng Index (HSI), launched on 24 November 1969, is a measure of the performance of Hong Kong Stock Market’s 50 largest companies. Altogether, the market capitalisation-weighted index reflects more than half of the total market capitalisation on the Hong Kong exchange, earning it the most-watched status for the Hong Kong economy.

Hang Seng Index history

Coming to almost 50 years in existence, the HSI had been an idea largely conceived by Hang Seng Bank’s chairman Ho Sin Hang to create a 'Dow Jones industrial average of Hong Kong' that seems to be performing just that role at present. The index had since been managed by HSI Services Limited, a subsidiary of Hang Seng Bank.

The index commenced with a base of 100 points per the stocks’ total value as of the market close on 31 July, 1964. Prices shot past the 10,000 mark first in 1993 and later crossed the 20,000 mark almost 13 years later, though it only took ten months in October 2017 for it to first touch the 30,000 mark. In the last twenty years, the HSI saw 1999 being its best year in terms of percentage change at 68.8% gains and the 2008 financial crisis inducing declines that resulted in the worst among which with a yearly fall of 48.27%. The HSI, along with the Hong Kong exchange, has often found itself a victim of deadly typhoons, having to pause market operations following typhoon signals or black rainstorm warnings issued by the Hong Kong Observatory.

Composition of HSI

The HSI is a capitalisation weighted-index, made up by the 50 largest and liquid companies on the Hong Kong Stock Market. This means that the larger component stocks will find a greater influence upon the overall index. Representation is capped at 10% to avoid any single stock domination, with only HSBC Holdings last reported to be meeting the mark. The 50 component stocks can be grouped into four categories forming its own sub-indexes. These are the finance, utilities, properties and the commerce & industry sub-indexes. A review of the index is conducted quarterly.

The latest update on the top five constituents by weighting is as follows:

Hang Seng Index trading hours

The Hang Seng Index trades between 9:30am and 4:00pm Hong Kong standard time, Monday to Friday, with an hour lunch break between 12:00pm and 1:00pm. The HS50 that tracks the movements on IG meanwhile trades without a break between sessions.

Factors influencing the Hang Seng Index

As with trading or investing in stocks, equity indices being a collective measure of stock performances are affected by the same drivers. These factors could be fundamental, technical or sentiment in nature. A quick guide on what moves indices markets can be found here.

Given the proximity to China and the large number of Chinese companies dominating the HSI, one can expect the economic and political backdrop in China to play the key role in affecting price movements. The fluctuations in the Chinese yuan likewise have a direct impact on the performance of the various Chinese companies listed on the HSI and thus the overall index itself. One would recall that the yuan devaluation in August 2015 took markets by surprise, sending the HSI declining while regional equity indices likewise had not been spared given the intertwined economies. More recently, we have seen US and China engaging in a series of retaliatory tariffs attack that struck the HSI both from fundamental and market sentiment angles, resulting in the sliding of the HSI into bear market territory despite consistent economic growth performance within Asia.

Why trade the Hang Seng Index?

Other than the fact that the index presents itself as a great avenue for exposure to some of the largest Chinese companies such as Tencent Holdings, and that you can access the 50 largest companies on the Hong Kong Stock Market all at one go, the HSI is also one of the most active indices in the world. This helps to see better liquidity for trading on the index. Alongside the likes of the Japanese equity indices, such as the Nikkei 225, the HSI is arguably the most widely known index in Asia. Movements on the HSI can also be rather large, which appeals to active traders such as those engaged in swing trading.

How to trade the Hang Seng Index

Evidently, depending on one’s risk appetite and goals, the trading of the Hang Seng index can also take various forms. Using the chart below - which depicts prices of the HS50 between 2017 and 2018 - we can see the evolvement of the price trends. A buy-and-hold strategy for investors or trend trading for traders had probably worked well in 2017, though the same cannot be said of 2018. More recently, range trading of between 24,520 and 27,267 appears to be a more viable option in light of the uncertainties within market locking prices in. Combining fundamental and technical analysis with a sense of the market sentiment can help you best identify the direction that the index will take when constructing your trading plan.

Top Hang Seng Index trading tips

In line with the rest of Asia, the opening market picture more often than not takes after the direction of how US markets have trended in the previous session. The nuances of the sentiment within Asia will also be captured in these first few moments of trade. The HS50 index within IG, which trades continuously, have sometimes been regarded to be better than futures in providing an indication of the opening levels for those watching the market open.

Price movements in the day can be affected by various economic indicator releases and political influences among others. One can, however, be sure that HSI traders will be sitting close watching Chinese releases within the lot. Rather than compare the release with the previous reading, it is typically the difference from the market consensus that would induce the movements for equity markets. Follow the news for reactions but also do refer to the economic calendars prior to prepare for the trading day.