What are Dow Futures?
Dow Jones Industrial Average or DJIA or simply the Dow is an index that tracks 30 large blue chip stocks trading on NASDAQ and NYSE. It was created in 1896 by Charles Dow and Edward T. Jones.
A futures contract is a legal agreement between two individuals or institutions that obligates them to transact an asset (commodities or shares) at a predetermined future price and date. It is important to understand that futures and options are different. In an option, the option holder gets the right but not the obligation to exercise the contract, whereas when you are trading in futures contract, you are obliged to exercise the contract.
DJIA Futures Contract Sizes and Time Periods
DJIA contracts trade quarterly. 3 Contract size are available for DJIA Futures.
- Mini-Dow - $5 times the DJIA
- Standard Dow - $10 times the DJIA
- Big Dow - $25 times the DJIA
Trading DJIA Futures
Before we proceed further, it is important to clarify that Futures trading in the United States of America is regulated not by the Securities and Exchange Commission (SEC), but by the Commodity Futures Trading Commission (CFTC). SEC only looks over stock trading.
You’ll need to open a trading account with a futures trading brokerage in order to trade DJIA. Futures trades are charged a commission when a position is opened and when it is closed. Total trading fees include commission, National Futures Association fees as well as exchange fees. Also, most futures brokers in the U.S.A. require a minimum deposit of $5,000 to $10,000 in order to open a trading account with them. Choose a broker that provides easy as well as efficient trading.
In futures trading, you can either buy long or sell short. If you expect that the value of the index to rise, you can long the DJIA futures. Similarly, if you believe that the value of the index will go down, you can short the DJIA futures.
After you have decided your move, you can either open a position or close it. To hold a position, you must have enough funds in your trading account to compensate for the maintenance margin level. You can either close a position completely or partially. DJIA futures contracts offer traders the ability to trade the overall U.S.A. stock market.
Trading hours
Futures are traded 23.5 hours per day, from Sunday to Friday. It provides great liquidity to traders.
The Dow Theory
Dow Theory states that the market is in an uptrend if one of its averages climbs to an important high then the other average is expected to accompany it or follow it within a reasonable amount of time.
The theory was derived from 255 Wall Street Journal editorials written by its founder and editor Charles Dow. After Dow's death, Robert Rhea, William Hamilton and E. George Schaefer organized The Dow Theory, based on Dow's work.
6 Principles of the Dow Theory
The Dow theory is based on 6 principles.
1. The market has 3 movements- The primary movement or the major trend may last from less than a year to several years.
- The secondary movement may last from 10 days to 3 months and usually retraces from 33% to 66% of the primary price change since the start of the main movement.
- The minor movement which varies with opinion from hours to a month or more.
Dow Theory says that market movements are composed of 3 phases:
- The accumulation phase - The accumulation phase is when the smart money enters the market. During this phase, the smart money is actively buying stock against the general sentiment of the market. The stock price, in the accumulation phase, doesn’t change drastically. This is due to the fact that smart money is in the minority demanding the stock that the market at large is supplying.
- The public participation phase - Public participation phase is when traders enter the market. What happens here is that, at some point, the market.
- The distribution phase - The distribution phase is when the larger public enter the market. During this phase, the smart money begins to sell their assets.
Stock Market quickly incorporates new information as soon as it is out. Once news is released, stock market will react to it and reflect this new information in stock prices.
4. Stock market averages must confirm each otherDow Theory states that the market is in a particular trend, and if one of its averages moves to an important position, then the other average should to accompany it or follow it within a decent amount of time. If this does not happen, then the averages are reflecting divergence and the market is inclined to reverse its direction.
5. Trends are confirmed by volumeDow was always of the belief that the volume confirmed price trends. According to him, we are able to get the true view of the markets, when price movements are accompanied by high volume. If a particular security is being traded actively, and the price is significantly moving in a particular direction, then this is the direction anticipated by the market to continue. To Dow, it was a signal of a trend gaining momentum.
6. Trends exist until definitive signals prove that they have endedDow strongly believed that despite the market noise, trends exist. Reversals in primary trends can often be confused as beginning of secondary trends. It can be difficult to decide whether a downswing in a bull market is a reversal or a short-lived rally to be followed by higher highs. Technical analysis tools may attempt to clarify the noise but they are interpreted differently by different traders.
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