Many traders like to trade the Dow Jones Industrial Average (DJIA), often known as the Dow, because of the volatility of the American markets. It’s easy to do using contracts for difference (CFDs). The Dow is made up of 30 major US companies, a much smaller number than many other indices, and they are carefully selected and weighted to provide a cross-section of the US economy.
As always with trading, you need to study the charts and perform whatever analysis methods you use to try and anticipate the direction that the index will go in. Even though there are only 30 companies, it is not worth trying to analyse each of these separately and combining the results. The Dow responds well to technical analysis, and performs as a composite price. For example, despite the fact that the index is assembled from many different stock values, you can observe the price finding support and resistance at whole numbers such as 10,000, 11,000, and 12,000.
Another advantage trading an index such as the Dow is that your trade is already diversified across many companies, which means you are protected from the wild swings that individual stocks may experience, while still having exposure to the economy in general.
When trading the Dow you need to be aware of the major factors that affect the US markets. There are news releases practically every day which can have some impact, but the ones which seem to affect the index the most include the jobless figures and the money supply. Some important indicators of the strength of the market include the market breadth, which is a comparison of the advancers and decliners, and using these you can find if the other stocks in the US markets are keeping up with the DJIA. If they’re not, it suggests that there’s not much strength to any moves. Some people refer to the Traders Index (TRIN), which combines the number of advancing and declining issues with the volume, when looking for confirmation of the strength.
Trading the Dow Jones: CFDs Example
At a certain CFD provider each full-sized Dow Jones contract corresponds to an exposure of $10, so a trader who is willing to risk $1500 would simply trade one contract (the broker also happens to offer Dow Jones mini-contracts priced at $2 per point which would be more suitable for those who want to deal in smaller sizes).
Here’s an example of trading the Dow Jones Industrials. The margin requirement per contract may be $50, with a spread of six pips and a pip value of one dollar. With a quote from your broker of 10816 – 10822, you can go long with 10 contracts for an initial margin of $500 at a price of 10822. This means you are actually controlling $108,220 worth of Dow Jones stock.
Assuming that the price goes up as you anticipate, later in the day you may be quoted 10857 – 10863, an increase of 41. You can close your position at 10857, which captures you 35 points — the other six points are lost in the spread, which covers your broker’s fees. At $10 per point you have gained $350 on the trade.
Trading the Dow is very popular, because of the transparency of the US markets, and the easy access to American news and information. Familiarity is important in being able to anticipate market moves.
