Trading individual equities involves a degree of risk, because even if the overall market trend is bullish, one company’s fortunes can always rise or fall. This is one reason why index funds — which attempt to track the whole market, segments of the market, or specific baskets of stocks — are such a popular tool for investors.
Yet indexes also offer many benefits for active traders: Liquidity, the possibility of lower fees and the ability to speculate on the future movement of the broader market.
Dow Jones futures represent one of the most popular of these products, with hundreds of thousands of contracts changing hands daily.
Let’s take a closer look at the fundamentals of Dow Jones futures: What they are, how they work, when you can buy them and how you can trade them.
What Are Dow Jones Futures?
Dow Jones futures (or DJIA futures) are binding contracts pegged to the spot price of the Dow Jones Industrial Average (DJIA) Market Index. These contracts allow traders to profit by speculating on the future price movement of the Dow Jones Index.
Futures contracts work by obligating traders to buy or sell a pre-set amount of an asset for a pre-set price at specified point in the future.
The Dow Jones Index is one of the oldest and most popular equity indexes, tracking 30 high-profile stocks across a diverse range of sectors. The Dow provides broad exposure to the stock market, although it is not quite as broad as the S&P 500.
Now that we’ve defined them, let’s take a closer look at how to trade Dow Jones Futures.
How Does a Dow Jones Futures Trading Strategy Work?
Trading Dow Jones futures is essentially a bet that you can predict whether the price of the DJIA will move in a particular direction by a certain point in time.
If you believe the Dow Jones Index will increase in value, you can go long on a futures contract. If the Dow is at 30,000 when you enter the contract, and it reaches 32,000 before the contract expires, you would generate a significant profit, while the party who sold the contract to you would incur a loss.
In essence, both parties are betting they can predict the price of the Dow Jones Index at the time the contracts are settled (their expiration date).
How Are Dow Jones Futures Prices Determined?
The Dow Jones Index value is determined very simply, as it tracks the performance of the 30 stocks within the index.
It’s important to note that the Dow is a price-weighted index, which means stocks with higher share prices are given greater weight in the index. This means the higher priced stocks within the Dow Jones Index have a greater impact on its value than the lower priced stocks.
For Dow Jones futures, a contract multiplier determines the dollar value of each point of price movement in the underlying index. The most popular Dow Futures contract, the E-Mini, has a multiplier of 5. This means if the Dow Jones Index rises 100 points, the buyer of the futures contract gains $500, while the seller loses $500, according to the contract multiplier.
How Are Dow Jones Futures Traded?
Dow futures contracts trade quarterly, which means contracts expire in March, June, September and December. Expirations typically occur in the third week of each month.
Contracts are settled in cash, rather than the underlying equities that comprise the index. Unlike commodities futures, there is no obligation to take possession of the underlying asset.
Learning how to buy Dow Jones futures contracts is simple: Traders can visit a broker and choose the E-Mini or the Micro E-Mini, which has a smaller multiplier (50-cents rather than $5). For traders seeking more leverage, there are other contracts that offer multipliers of up to $25. As the most popular futures product, the E-Mini offers the highest liquidity.
Opening a position is easy: You either buy a contract to go long or sell to go short. To close your trade, you simply enter an opposite order. For example, if you opened 10 E-Mini contracts, you sell them with the same expiration date. If you started the trade by selling 10 E-Mini contracts, you buy 10 to close the trade.
Given that Dow Futures track 30 companies, fundamental analysis doesn’t play quite the same role as it does with an individual stock. Yet traders can still take advantage of technical analysis and develop a Dow Jones futures forecast by studying historical price action and trends.
By using charts and technical indicators, it is possible to analyze the historical trend of a futures down to the intraday level and develop timing-based strategies that can help govern your entries and exits, and your decisions whether to go long or short on Dow futures.
When Can You Trade Dow Jones Futures?
While the stock market trades Monday through Friday and has regular opening and closing hours, you can trade futures six days a week and nearly 24 hours per day. E-Mini contracts trade continuously from Sunday evening to Friday afternoon, for example.
Even when the stock market is closed, index futures continue to trade in after-hours sessions. Prices on underlying equities/assets continue to change even though the stock market itself is closed. This explains why the price of an asset may shift significantly between its closing price and its opening price the following day.
It’s important to note that liquidity may decline significantly during overnight/very early morning hours, and volatility may increase. Many futures traders prefer to trade between 9:30 a.m. and 11 a.m., as there is overlap between European and U.S. trading during this period, which increases liquidity.
How Can RJO Futures Help?
The first step toward trading Dow Jones futures is opening an account at a trusted brokerage. RJO Futures specializes in all forms of futures trading and has a powerful set of trading tools that can help you maximize your odds of success. RJO Futures also has a dedicated team of futures trading experts who can help ensure that you are in the best possible position to succeed.
Contact RJO Futures today to learn more.
