How to Trade Dow Jones Futures Contracts

The Dow Jones Industrial Average (DJIA) is the oldest and probably most recognizable benchmark stock index in the world. The DJIA tracks 30 blue-chip U.S. stocks selected from nine principal market sectors. Like the other major benchmark index, the S&P 500 Index, the DJIA is intended to be representative of the overall U.S. stock market.

A futures contract is a legally binding agreement between two parties in which they agree to exchange money or assets based on a relationship to a predetermined price of an underlying index.

Different from an option, which gives the holder the right but not the obligation to exercise the terms of the deal, a futures contract legally binds both parties to perform their part of the deal.

The popularity of trading DJIA futures contracts has increased along with the popularity of index-based trading. Trading a stock market index directly is not an option for investors, but DJIA futures contracts provide a derivative instrument that enables individual or institutional traders to make trades based on the direction in which they believe the index will move.

DJIA futures contracts offer traders an easy way to trade the overall U.S. stock market through an investment vehicle that is extremely liquid and that uses considerable leverage. The futures are popular trading instruments with both long-term and day traders.

DJIA futures contracts are one of the principal financial futures, with an average daily trading volume for the E-mini Dow futures of more than 100,000 contracts.

One of the key features of futures trading is the tremendous amount of leverage available. An investor can obtain five times leveraged exposure to all the stocks in the DJIA for less than $5,000 in a futures contract by margin trading the E-mini DJIA. However, leverage magnifies both gains and losses. The E-mini contract represents $5 times the DJIA. Thus, a change in the index of 100 points – for example, from 25,807 to 25,907 – translates to a $500 gain or loss per contract.

There are three DJIA futures contract sizes available that offer increasing amounts of leverage. The E-mini, or mini-Dow, contract, as noted above, represents $5 times the DJIA. The standard Dow futures contract represents $10 times the DJIA market value. The Big Dow contract is $25 times the index value.

DJIA contracts trade quarterly with nearly all the trading volume taking place in the nearest expiration month. Traders can easily roll over their positions from one quarterly contract to the next as the expiration date for the current contract nears.

There are also options on DJIA futures contracts available for trading.

The first step required for trading DJIA futures contracts is to open a trading account with a futures trading brokerage. Futures brokerage houses are registered and regulated separately from stock brokerage firms, although many brokerage firms offer both stock and futures trading. Futures trading is regulated by the Commodity Futures Trading Commission (CFTC), rather than the Securities and Exchange Commission (SEC) that oversees stock trading.

Popular futures brokers include E*Trade, TD Ameritrade and Interactive Brokers. Futures trades are charged a commission on each side of the trade, when a position is opened and when it is closed. Total trading fees include commission, National Futures Association (NFA) fees and exchange fees.

Most U.S. futures brokers require a minimum deposit of $5,000 to $10,000 to open an account, although some offer substantially lower minimums. Key considerations in choosing a broker are the ease and efficiency of the trading platforms provided, commission charges, customer service and extra features offered, such as news and data feeds, analytical tools and charting.

After selecting a broker and depositing funds into a trading account, the next step is to download the broker's trading platform and familiarize yourself with it. You don't want to get caught in a rapidly moving, volatile market, attempting to make quick trading decisions and order placements while being frustrated by the inability to act quickly because you haven't become proficient in using your trading software.

Check out the trading platform and all its features thoroughly so you can access helpful trading tools, such as chart analytics, trading data and the opportunity to test out various trading strategies through a trade simulator.

Once you are familiar with your trading platform, select your trading strategy and test it using a demo or trade simulator account. Only begin actual live trading with real money after you have arrived at a strategy that is consistently profitable in simulated trading. This is an even more important consideration when trading with highly-leveraged investments.

Some traders prefer to execute their own chosen trading strategies manually. Others prefer to subscribe to trade signal services or utilize trading robots that automatically execute trades.

In futures trading, a trader can either buy long or sell short with equal ease. Futures trading is not burdened with the same short selling regulations as stock trading. You can choose to buy the DJIA futures if you expect the index value to go up, or sell short if you expect the index value to decline. Take a trading position in the futures contract trading month you want to trade – most likely the contract trading month with the closest expiration date, as that will be the most heavily traded and the most liquid contract.

When you open a position, the broker will set aside the required initial margin amount per contract. To hold the position, you must have sufficient trading capital in your trading account to cover the maintenance margin level. The maintenance margin amount is lower than the initial margin requirement, usually by about one-third.

If your account dips below the required maintenance margin level, you will receive a margin call from your brokerage that requires you to liquidate trade positions or deposit additional funds that are sufficient to bring the account back up to the initial margin requirement. Margin calls generally must be met prior to the opening of regular hours trading the following day.

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

It is also possible to partially close out of a trade position if you have more than one contract – for example, selling three of five contracts originally bought, leaving a position of two contracts open.

Compared to the U.S. stock market that normally trades 7.5 hours per day, five days a week, financial futures are traded 23.5 hours per day, Sunday through Friday, providing traders with greater liquidity.

• During regular U.S. stock market trading hours, the DJIA futures contract price very closely mirrors the current index value.
• During U.S. overnight trading, the futures contract value represents the value projections of traders for the following trading day. These projections can easily be influenced by economic data releases in other countries and by the price movements on other major stock markets, such as the Tokyo Stock Exchange (TYO) or London Stock Exchange (LSE).