What Are Dow Jones Futures & How To Trade
The position you take on a trade is the purchase price you have agreed upon with the seller. Dow Futures contracts trade on an exchange, meaning that the exchange is who you deal with when you create your position (your price and contract) on the commodity. Futures are a much more complex financial instrument than stocks and bonds and should only be traded by experienced investors. Futures can certainly help an investor realize profits but should How to buy bitcoin with prepaid card be traded with care. There are now two Dow futures contract sizes available, both of which trade on the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME).
Dow futures trade nearly round the clock
The S&P 500, Dow, and Nasdaq 100 futures contracts trade on the CME Globex system and are called E-mini contracts. Contracts are updated four times per year, with expiration taking place during the third month of each quarter. In the equity market, buying on margin means borrowing money—using “leverage”—from a broker to purchase stock.
Energy Prices
But others are settled in cash, the amount of which is the difference between the agreed-upon price and the market price when the future date arrives. Futures commit you to buying or selling an underlying asset at a specific price on a preset date. We use “underlying asset” in the vaguest sense since investors trade futures for virtually all commodities, financial securities, and more. One of the other big benefits of trading the Dow futures comes from the fact that the futures markets are open much longer than the U.S. stock market trading hours. Therefore Dow futures, among other futures contracts are some of the widely traded contracts, not just in the U.S. but overseas as well.
- The Dow Jones futures use a multiplier of 10 (often called 10 to one leverage or 1,000% leverage).
- Dow Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the Dow Jones Industrial Average market index.
- The trader must understand that many factors can drive market index prices, including macroeconomic conditions such as economic growth and corporate earnings.
- Options give the contract holder the right — but not the obligation — to settle the contract.
Managing Leverage and Margin Requirements
Today, the retail day trader can trade the Dow Jones Industrial Average in many different instruments ranging from CFD’s to ETF’s, options and of course futures contracts. Among these different ways one can invest or speculate on the Dow Jones, the Dow futures are the most popular and for a number of reasons, some of which are listed below. 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.
Index futures prices can fluctuate significantly until the contract expires. As such, traders must have enough money in their accounts to cover a potential loss, which is called the maintenance margin. This sets the minimum amount of funds an account must hold to satisfy future claims. Geopolitical events, supply disruptions, and changes in demand because of economic growth can significantly impact energy prices. As such, energy futures are among the most vital parts of the commodities market, including crude oil, natural gas, gasoline, and heating oil. These contracts are crucial for energy producers and consumers to hedge against the volatile nature of energy prices.
Once you know your trading platform, select a trading strategy and test it using a demo or trade simulator account. Only begin live trading with real money after you have a strategy The Most Important Thing that is consistently profitable in simulated trading. This is even more important when trading with highly leveraged instruments such as futures. The Dow is often considered synonymous with “the stock market,” though the S&P 500 Index, which is comprised of at least 500 constituents, more broadly represents the U.S. equities market. Still, Dow index futures are a popular tool for getting broad-based exposure to the U.S. equity market or hedging such positions.
There are four main futures contracts for the Dow Jones Index listed on the Chicago Mercantile Exchange (CME). All of them include different multipliers, which will impact the potential gains ADSS forex broker or losses after each trade. The process is similar to regular trading – buy long or sell short, both of which you can do with equal ease. Take note of the trading month before taking a position in the futures contract – the one with the nearest expiration date will likely have the most trading volume.
Besides earnings, the nearly 24 hour futures markets mean that the Dow Jones futures is also susceptible to foreign and even domestic political and economic factors. Market sentiment is fickle—if a company reports huge earnings, and the Dow Futures skyrocket, the odds are good that the stock market itself will rise as well. If an unexpected weather event shuts down major shipping lanes before the stock market opens, it could cause the Dow Futures to drop, because investors begin anticipating problems. This creates the possibility of stocks also falling once the opening bell rings. Unlike the stock market, financial futures trade six days a week, Sunday through Friday, and nearly around the clock.
If the trader doesn’t supply sufficient funds in time, the trader’s futures position may be liquidated. Another way to hedge using futures is if you own a broad and diversified portfolio of stocks and want to protect yourself against downside risk. Closing a position simply means entering an opposite trade to close an existing position.