Investing in Indices - What is the Dow Jones Index?
What is the Dow Jones index? The Dow Jones is one of the main indices on Wall Street, along with the S&P500 and the Nasdaq. Trading the Dow Jones share index offers us great opportunities as it is one of the most powerful financial markets.
Table of Contents
- What is the Dow Jones?
- How to trade the DJIA with CFDs
- Trading Styles for the DJIA
- Dow Jones Investment Strategy - Example
- Investing in Dow Jones - Technical Indicators
- What is the best time to invest in the DJIA?
- News to consider when investing in the DJIA
- Correlation of DJIA and other instruments
- DJIA volatility
- DJIA - 10-Year Dow Jones Price
- DJIA - Day Trading Strategy
- Investing in the DJIA - CFD vs Futures
- Dow Jones - Buy Stocks
- Investing in the DJIA - Why Choose Admiral Markets?
What is the Dow Jones?
Created at the end of the 19th century by Charles Dow, the Dow Jones Industrial Average (Dow Jones Industrial Index or DJIA index) is one of the most traded indices on the US stock market, along with the Nasdaq, the S&P500 and the Russell2000 (index of small cap companies). Given the longevity of the DJIA, it can be said that it not only reflects the price of the country's large industrial companies but also the evolution of the US economy over the last century.
✍ Originally it was made up of 12 stocks but little by little it added companies until at the end of the 1920s it added up to 30, configuring the DJIA that we know today. Of the dozen that began trading with the birth of the index, none remain after General Electric's departure in the summer of 2018.
The Dow Jones Industrial, commonly known as Dow Jones 30 or DJI30, is a benchmark of the US financial market. Like the Nikkei 225, the DJI30 weights the price of its component stocks, which means that companies with the highest priced stocks have the most weight in the index, regardless of their real value in the economy.
Be that as it may, the truth is that the DJIA is a clear thermometer for the health of the US economy:
- If the US economy grows ➡ The DJI30 rises
- If, on the contrary, the US goes through a crisis ➡ The DJI30 falls.
Among the companies that make up the current Dow Jones are Coca Cola, Walt Disney, Goldman Sachs or McDonald's.
Who is in the Dow Jones? Currently, the companies that make up the DJIA are:
- American express
- Cisco Systems
- Walt Disney
- Goldman Sachs
- Intel Corp.
- JPMorgan Chase
- Coca Cola
- United Health Group
- Procter & Gamble
- The Travelers
- Merck & CO
- Walgreens Boots Alliance
- Johnson & Johnson
- 3M Company
- The Home Depot
- Chevron Corp
- Dow Inc.
Source: Yahoo Finance. As of September 9, 2020.
The composition of the DJIA changed on August 31 as a result of Apple's share split in a 4 to 1 ratio, a movement that significantly reduced the weight of the technology sector in the weight of the index.
From then on, Salesforce.com, Amgen and Honeywell were added to the index, replacing Exxon Mobil, Pfizer and Raytheon Technologies.
This is the third time in this century that the DJIA has transformed by suddenly switching to three of its components. The first time was in 2004 when Pfizer, Verizon and American International Group entered. The second was in 2013, with the inclusion of Goldman Sachs, Visa and Nike in the index.
How to trade the DJIA with CFDs
To buy DJI30 CFDs with Admiral Markets UK LTD you just have to follow these steps:
1️⃣ Log in with your Admiral Markets account, either through MetaTrader 4, MT5, WebTrader or the mobile app.
2️⃣ In the tab 'Market Watch' click the right mouse button on the word 'Symbols'
3️⃣ Write the index symbol, in this case, DJI30.
4️⃣ Then double click on 'DJI30'.
5️⃣ Once the dialogue box is open, right-click and choose 'Chart Window'.
6️⃣ When the graph has appeared you can choose the number of lots.
7️⃣ Finally, click on 'Buy' with the shortcut 'Trade with one click'.
To sell DJI30 CFDs the process is the same but in the last step, instead of buying, click on 'Sell'.
Trading Styles for the DJIA
We have different options at our disposal to trade CFDs on the Dow according to our trading style. Here are some of them:
- Very short-term trading: Scalping
- Short term: Day trading
- Medium term: swing trading
Scalping and Day trading
Both scalping and day trading allow us to take advantage of the price movements that develop throughout the trading session in the US market. For traders who like to obtain immediate and fast results, scalping and day trading allow trading in very short periods of time, within the same day and before the session closes. Of course, it requires being in front of the screen without losing sight of it while we operate.
To limit negative results as much as possible, it is recommended that, whatever our trading style, we maintain discipline at all times and try to learn from our mistakes without losing our temper. Only then can we improve and gain experience.
For those who prefer to operate in a more relaxed and calm way and for those who have little time to dedicate to trading, one option to consider is swing trading. The swing trader does not need to be in front of the screen continuously since the idea is to find opportunities in longer periods of time, such as a week.
If you want to practice different strategies without putting your capital at risk, you can do so with a demo account. Click on the following banner to open a FREE demo account:
Dow Jones Investment Strategy - Example
The trader buys a lot at 27,200 points and closes at 27,250 points. Result: 50 * 0.90 € = 45 € profit.
Sell a lot at 27,100 points closing at 27,000. Result: 100 * 0.90 € = 90 € profit.
It is important to emphasize in this regard the value of a point based on the number of lots traded on the DJI30 CFD chart:
- 0.1 lot equals approximately € 0.09 per point
- 1 lot equals approximately € 0.90 per point
- 10 lots are equivalent to about € 9 per point
However, when in doubt, you can use our trading calculator to run simulations on the DJI30 CFD. This tool allows you to choose the leverage, the number of lots and the price of the entry and exit position, so it is very useful for helping make the best decision.
Source: AdmiralMarkets.com (date: February 24, 2020).
Investing in Dow Jones - Technical Indicators
Traders have many different technical indicators. We have chosen the two that we consider to be the most optimal when trading CFDs on Dow Jones.
The Alligator indicator makes it easy to find the potential direction of DJI30 CFDs.
- The trend will be bearish if the Alligator moving averages are in the following configuration Green <Red <Blue
- The trend will be bullish if the Alligator moving averages are in the Green> Red> Blue configuration
Bill Williams fractal
Bill Williams' Fractal Indicator identifies visible ups and downs on the DJI30 CFD trading platform. This technical indicator is often used to take a position on the breakout of these peaks and troughs based on the current trend of the index.
What is the best time to invest in the DJIA?
➢ When the US session begins, the Asian markets have already been closed for about two hours but in Europe, it is still daylight and the European trading sessions are still open. It is at this moment when trading volumes are most important.
➢ Once activity in the US markets has ended, there is a decrease in trading around 10 pm, until the Asian markets open. It’s important to know that the DJI30 CFD index is available 24 hours from Monday to Friday, which means greater trading opportunities.
➢ Added to this is the fact that the US economic calendar is very rich in news, which continues to influence the Dow Jones. This allows us to select the times we spend trading if we choose to do so during posting hours.
News to consider when investing in the DJIA
News from the companies that make up the DJIA has a decisive influence on the price of the index, especially those of American Express, Apple, Boeing, Caterpillar and Chevron. Some call this ‘Dow Jones news’.
Likewise, the following factors in the US also impact the Dow Jones:
- Fed interest rates
- Fed appearances
- Unemployment rate
- Balance of trade
- NFP (Non-Farm Payrolls)
- Inflation rates
- GDP growth rate
- Retail sales
- Durable and industrial goods orders
- Business sentiment
- Consumer confidence
Holidays in the USA
Any trader, beginner or professional, should know the holidays in the US during which the market is closed (2021 calendar).
- January 1 New Year
- January 18 - Martin Luther King Day
- February 15 - Presidents' Day
- April 2 - Good Friday
- May 31 - Memorial Day
- July 5 - Observance of independence Day, July 4, which occurs on Sunday
- September 6 - Labor Day
- November 25 - Thanksgiving Day
- December 24 - Observance of Christmas Day, which occurs on Saturday
Correlation of DJIA and other instruments
Source: Admiral Markets MetaTrader 5 Supreme Edition.
The image shows the correlation between the DJIA and other major markets as of September 9, 2020. In the preceding 50 days it turned out that the DJIA CFD was highly correlated with:
- SP500 with a score of +89
- DAX30 with a score of +97
On the other hand, a very slight correlation is observed with respect to the EURUSD with a score of only +32.
In short, the strong correlation present between the different stock indices can be verified. This correlation analysis is one of the ways to analyze and trade the Dow Jones to see the probabilities and capture the best periods of volatility for this index.
The Dow Jones CFD has increased its volatility by an average of 445 points per day since the start of 2020. This volatility is most marked, as you would expect, during US trading hours.
This is why many traders wait for the start of the US session to take advantage of the increased volatility.
If you want more information about all these concepts, you can sign up for free for our Zero to Hero trader course. Just click the following banner:
DJIA - 10-Year Dow Jones Price
If we look at the MetaTrader 5 Admiral Markets charts we can see that the performance of the US index is as follows:
|Variation end 2019||22.00%|
|Variation 3 years||45.00%|
|Variation 5 years||68.00%|
|Variation 10 years *||186%|
* As of September 10, 2020
As can be seen in the Dow Jones chart below, in the last decade this important index has risen exponentially by nearly 200%. The year 2019 was not bad at all since it closed with a revaluation of 22%, 28,500 points up, at all-time highs.
Source - MT5 Admiral Markets - Dow Jones Weekly Chart. Data range: August 2008, to January 2020. Prepared on September 9, 2020, at 5:00 p.m. Please note that past performance is not a guarantee of future performance.
As we can see in the graph above, the Dow Jones began a marked upward path in March 2009 until March 2020, at which time the coronavirus spread throughout the world until it became a pandemic, forcing the majority of governments to shut down their economies.
Despite the collapse that the markets suffered at that time, the Dow Jones managed to turn the situation around and in September 2020 it was close to recovering almost everything it had lost from the pandemic.
DJIA - Day Trading Strategy
Next, we will look at a simple strategy that can be used to perform intraday trading visually and quickly. Let's see what the parameters of this strategy are:
Time Frame: 5 Minute Charts
Bill Williams Indicators:
- Alligator: We will use this indicator with its default settings to determine the trend
- Fractal Indicator: We will use this indicator to look for signals in the Dow Jones 30
Trading hours: From the opening of the session in the United States, after 3:30 p.m.
Buy signal: Breaking of the upper resistance fractal by the price and with the alligator waking up or in trend. Let’s look at the Dow Jones live chart below:
Source: MetaTrader 5 Supreme Edition by Admiral Markets. 5-minute chart of the DJI30 from September 9, 2020, at 5:00 p.m.
Sell signal: Breakdown of the lower support Fractal by price and with the alligator waking up or in trend. Let’s look at the Dow Jones chart below:
Source: MetaTrader 5 Supreme Edition by Admiral Markets. 5-minute chart of the DJI30 on September 10, 2020, at 5.30 p.m.
Investing in the DJIA - CFD vs Futures
In addition to CFDs, other instruments allow us to take advantage of the up and down movements of the Dow Jones: futures contracts. Let's see what are the main characteristics of these:
Dow Jones Future Live Index
Dow Jones index futures in real time are more expensive than CFDs. These are some differences between the two:
❌ Futures involve entry and exit fees.
❌ A higher margin is required in the case of futures, which means owning more initial capital.
❌ Trading futures is reserved for experienced traders with good risk management.
On the other hand, futures and CFDs are traded in the same way, with similar processes of graphical and trading analysis.
As we have seen, trading the DJI30 with CFDs is much cheaper than with futures. This is so because CFDs allow you to speculate on a large number of different and varied products, being able to use leverage. That is, we can trade a higher amount than if we use futures.
Based on this, we can cite the following advantages of CFDs:
✔️ The CFD market is more affordable for small trading accounts.
✔️ The typical spread is low.
✔️ Ability to operate with leverage.
✔️ The required margin is lower.
In short, the cost of CFDs is lower since it does not include commissions, only the spread is taken into account.
Dow Jones - Buy Stocks
If you are thinking of buying Dow Jones stocks, Admiral Markets offers you two possibilities:
- Buy CFDs on stocks with the Trade.MT5 account.
- Buy shares directly with the Invest.MT5 account.
Stock market data and their respective CFDs are available in real time and free of charge for live accounts, while demo accounts have a delay of 15 minutes.
If you are new to the Stock CFD market, we recommend that you familiarize yourself with the key information documents for Stock CFDs and ETFs.
Investing in the DJIA - Why Choose Admiral Markets?
Choosing Admiral Markets as a broker has, among others, these advantages:
✴️ You are protected by the FCA, the British regulator, characterized by its strict requirements.
✴️ Our clients are protected against an unlimited negative balance for retailers and up to £50,000 for professional traders.
✴️ Client funds are in segregated accounts.
✴️ Leverage can go up to 1:20 for retailers and 1:500 for professionals.
✴️ You can access our protection tool against volatility.
✴️ Speed and comfort with one-click operations, in seconds.
✴️ You can trade Mini lots, available on the CFD Index.
✴️ You have the best trading platforms, with MetaTrader 4 and MT5 completely free.
✴️ There are no minimum differences for stop loss and take profit.
✴️ You can adopt bullish or bearish positions through CFD DJI30 without expiration to take advantage of the progression of the US economy or correction periods.
✴️ With Dow Jones CFDs you can trade at all hours, even at night.
✴️ Deposits and withdrawals are free.
Which account to choose to trade with the DJIA?
How to trade the Dow Jones? You can trade the DJIA CFD on Admiral Markets through the following trading accounts:
- Trade.MT4 on the MetaTrader 4 platform
- Zero.MT4 on the MT4 platform
- Trade.MT5 on the MetaTrader 5 trading platform
DJIA - Trading Platforms
- MetaTrader 4 and 5 Supreme Edition on Windows and MAC
- MetaTrader 4 and 5 on iPhone and iPad tablets
- MetaTrader 4 and 5 for Android and tablets
- MetaTrader 4 and 5 Online WebTrader
The MetaTrader is one of the platforms most used by traders around the world to trade CFDs.
Admiral Markets offers free demo accounts with the real conditions of the CFD index markets, allowing you to test your strategies safely, without risking your money.
DJIA - Last words
Trading the Dow Jones stock index, one of the major stock indices in the world's largest economy, allows you to take advantage of many market opportunities. As you may have seen throughout this article, the DJIA is accessible in several ways:
- Through futures (for professionals with large startup capital)
- With CFDs, accessible to small accounts
- Directly with index stocks
There are multiple possibilities suitable for each type of trader. All this without mentioning that you can use scalping and day trading strategies. For those who prefer long-term investments or have a full-time job, swing trading is a perfect fit for the DJIA.
If you want to start trading with the DJIA or any other index using CFDs, just click on the following banner and open a live trading account:
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About Admiral Markets
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