Day traders often use the United States stock indices, such as the Dow Jones, because the prevailing market biases make the potential of short-term trading much more perceivable. For more than nine years, the Dow Jones has been in a bull market, which is valuable to short-term traders as it helps them in their day-to-day position trading.
What is the Dow Jones?
The Dow Jones Index is a stock index that measures the performance of 30 of the biggest companies in the United States. As a result, it is a crucial measure of the strength of the financial markets in addition to being one of the most widely quoted equity benchmarks.
Created in May of 1896 by Edward Jones and Charles Dow, the Dow is one of the oldest stock indexes globally. Being a price-weighted index means the value of other indexes, such as the FTSE100 and German Dax weighted by market cap, determines the Dow’s value. When it comes to the Dow, its constituents’ per-share price comes in handy in defining its value.
An Overview of the Dow’s Constituents
The Dow’s biggest constituents by weighting include home improvement retailer Home Depot, investment bank Goldman Sachs, and healthcare giant United Health Group. Other popular businesses featured in the Dow include McDonald’s, Boeing, and Apple.
Top Reasons for Trading the Dow
The Dow remains attractive to most traders looking forward to focusing on the large blue-chip stocks mainly because it tracks the 30 popular and largest companies in the United States economy. The impact is lucrative whenever trends display themselves across asset classes.
Consequently, this helps traders get a bias in the stock market, meaning short-term day trading strategies need to be focused on the prevailing price movement trend, such as the 200 Day Moving Average, used to gauge or measure trends.
Strategies to Day Trade the Dow
When it comes to trading the Dow during the day, most traders claim it is a challenging moment. Trading days are different, meaning that trading involves a lot more than just guessing the direction the share prices of an index or stock will take.
Traders need to recognise the significance of Dow Jones Risk & Compliance as a crucial determinant to one’s success or failure when trading individual stocks.
The future is unclear, and this will remain so for the foreseeable future. Thus, traders ought to include technical analysis to have the upper hand over the market performance, even if only slightly.
Nonetheless, losses are inevitable, and if left unattended, a single loss can eliminate all the gains from winning trades. The general rule that traders need to be accustomed to is to minimise their losses while letting the winnings run for both short-term and long-term trades.
How to Calculate the Dow
As said earlier, financial experts calculate the Dow’s value as a price weighted index. The individual share prices of its constituents are aggregated and then divided by a Dow divisor. This figure is intended to account for the index’s potential anomalous effects of stock adjustments or splits.
The subsequent stocks list comprises the individual companies with the largest stock prices at the top, contrary to the market cap determining the best stocks.
What the Dow Price Signifies
The Dow’s price signifies how the individual companies stock prices will move in a bull or bear market. Should the Dow’s price increase, it shows that a particular company is witnessing gains, which reflects in the overall index’s price. Equally, if the Dow’s price weakens, it shows the companies are seeing a decline in price action.
The weighted average of the stock prices defines the Dow ranking. It shows that companies with large weighting usually realise stock price fluctuations and correspondingly affect the wide index.
What Moves the Dow Price?
Several technical and fundamental factors associated with the US economy performance moves the Dow’s price. Also, Federal Reserve monetary policy, foreign exchange rates, earnings reports, commodity prices, major company news and economic events usually have a considerable effect on the price. Trade wars, such as the US-China trade war, also move the price.
Although investors expect these drivers to move the indices in particular directions, there is no assurance that it is always the case. Therefore, it would be sensible if traders considered how these drivers work alongside one another instead of analysing a single factor.
Market Hours for the Dow
Trades on the Dow are possible when the US markets are active and open, mainly between 9:30 AM and 4:00 PM Eastern Time. However, it is notable that the Dow’s trading hours are also available through futures markets and CFDs as they remain active even after the US markets close. Trading index futures is prevalent as the market remains open 23.25 hours a day.
The most liquid time to trade is typically around the US market hours when exchange-traded funds (ETFs) and stocks are trading alongside related futures contracts. Managing trades is a huge point of focus for all day traders. As said earlier, one should be cautious of the potential losses by placing the right trade size and using trading alerts.
Trading Dow CFDs
When trading in Dow CFDs, remember you will never receive direct ownership of the asset. You can only speculate on the index’s market performance.
Trading Dow Options
The Dow gives traders the right to buy and sell indices at a given price on a given date.
Trading Dow Futures
Futures are agreements to buy and sell assets at a specific price on a set expiry date. Compared to other futures, it is notable that Daw futures lack physical assets to exchange because the index merely represents a group of stocks.
Trading Dow ETFs and Stocks
It is possible to trade the Dow via exchange-traded funds or other trading instruments that hold stocks. Alternatively, one can choose to trade Dow stocks individually.
How to Short the Dow
Shorting the Dow indexes entails forecasting that the index will weaken. Traders can do this by shorting constituent stocks or short selling a Dow contract. On the other hand, traders can consider shorting a Dow ETF. When it comes to options, one can buy Dow stocks put options if they seem to be overvalued. Else, buy Dow ETF put option.
Invest in Dow Stock Index
Anyone that wants to invest in the Dow stock index needs to sign-up at a reputable and trustworthy online broker firm, such as Tixee. Join Tixee today, and get access to a wide range of tradable assets on the award-winning MT5 trading platform.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.