How to Trade Dow Jones Index Futures

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How to Trade Dow Jones Index Futures

Futures contracts such as the E-mini Dow allow almost anybody to trade or invest in the Dow Jones Industrial Average (DJIA), the world’s most recognizable stock index. The Dow Jones Industrial Average covers 30 blue-chip US equities from nine industries, ranging from industrials to health care to consumer staples.

The Dow is often associated with “the stock market,” while the S&P 500 Index, which has 505 components, more comprehensively captures the US stocks market. Nonetheless, Dow index futures remain a popular strategy for gaining wide exposure to US stock or hedging such bets.

Key Takeaways

  • Dow Jones futures contracts allow almost anybody to bet on whether the wider stock market will grow or decline.
  • Dow futures contracts may be traded on leverage, which means that you just need to put up a portion of the contract’s value.
  • Dow futures markets make short-selling the larger stock market considerably easier than individual equities.

Futures Trading Basics

A futures contract is a legally binding agreement between two parties to purchase or sell an underlying asset in the future at a preset price. The buyer accepts the responsibility to purchase, and the seller undertakes the obligation to sell. In the meanwhile, the value of the underlying asset—in this example, the Dow—will normally move, offering the chance for gains or losses.

Some commodities futures contracts, such as bushels of corn, still need physical delivery of the underlying goods, but this is not the case with Dow and other financial market futures, which were designed to enable traders to simply hedge risk and speculate for profit. They may be paid in cash.

Trading the Dow With Futures Contracts

Simply put, DJIA futures contracts allow traders and investors to gamble on the way they feel the index, which represents the wider market, will move. Dow futures are a popular strategy to trade the whole US stock market due to their simplicity, huge trading volumes, and accessible leverage. Every day, over 200,000 E-mini Dow contracts are traded.

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Both the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange currently offer two Dow futures contract sizes (CME).As previously stated, the E-mini, or mini-Dow, contract is worth $5 every tick on the DJIA. As of January 2022, the Micro E-mini is one-tenth the size of the E-mini and trades at 50 cents per point with a margin requirement of about $800.

Dow futures are offered quarterly in addition to the front month, with expirations in March, June, September, and December. These contracts are cash-settled, which means that delivery is made in the index’s equivalent value rather than in the equities that comprise the index itself.

Trading Hours

Financial futures trade six days a week, Sunday through Friday, and practically around the clock, unlike the stock market.

  • The DJIA futures contract price closely reflects the index value during normal U.S. stock market trading hours.
  • When the stock exchanges in the United States are closed, certain index futures may continue to trade in after-hours sessions. These prices, which persist long after the underlying component stocks have been closed, might be impacted by economic data releases, monetary policy choices made in other nations, or geopolitical events.
  • Dow trading hours are as follows: 8:30 a.m.—3:00 p.m.; trading halts between 3:15 p.m. and 3:30 p.m.; CME Globex trading restarts between 3:30 p.m. and 4:15 p.m.; trading continues on CME Globex between 5:00 p.m. and 8:30 a.m.

Using Leverage in Trading

Leverage is one of the most appealing aspects of futures contracts. A trader may purchase an E-mini Dow contract for about $5,500, and that contract is worth $5 for every point on the DJIA. So, if you purchase when the index is at 29,000 and sell when it reaches 30,000, you’ve profited $5,000, practically doubling your money.

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But keep in mind that leverage works both ways, amplifying losses as well as rewards. A 1,000-point decline on the Dow would virtually wipe away your $5,500.

Opening a Futures Trading Account

The first step in trading Dow futures is to create a trading account or, if you already have a stock trading account, to ask your brokerage for futures trading approval. Stock index futures are available from most major brokerages, including E*Trade, TD Ameritrade, and Interactive Brokers. When a position is established and cancelled, they usually charge a commission.

The convenience of the trading platform, commission rates, customer support, and features like as news and data feeds, as well as analytical tools such as charts, are all important factors to consider when selecting a broker.

Select a Futures Trading Strategy

After choosing a broker and funding a trading account, the following step is to download and learn how to utilize the broker’s trading interface. You don’t want to be caught trying to make rapid trading judgments in a turbulent market until you’ve mastered your trading program.

Before you start putting your money at danger, put your trading method to the test.

Once you’ve mastered your trading platform, choose a trading strategy and put it to the test using a demo or trade simulator account. Only begin live trading with real money once you have established a winning technique in simulated trading. This is especially true when trading highly leveraged products like futures.

Futures trading allows you to purchase long or sell short with equal simplicity. Futures markets are not subject to the same restrictions on short-selling as stock markets. If you think the DJIA will rise, purchase a futures contract; if you think it will fall, sell one short. Take a position in the trading month of the futures contract you wish to trade—the one with the nearest expiry date will be the most regularly traded.

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Futures Margin Requirements

When you initiate a trade, the broker will deposit the necessary initial margin amount into your account. To keep the trade open, you must have enough funds in your account to satisfy the maintenance margin. The maintenance margin is less than the required starting margin.

If the value of your account falls below the maintenance margin level, your brokerage will send you a margin call, requiring you to sell trading positions or deposit extra cash to bring the account back up to the needed level.

Closing a Position

Close an open trade simply by entering an opposite order. For example, if you opened the trade by buying five E-mini Dow contracts, you would close the trade by selling them with the same futures contract expiration date. If you opened by selling five contracts short, you would need to buy five to close the trade.

It is also feasible to close out a position partly if you have more than one contract—for example, selling three of the five contracts purchased, leaving a position of two contracts open.

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