Dow Futures Explained (Part I)

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Dow Futures began trading at the Chicago Board of Trade (CBOT) in 1997. Every day Dow Futures begin trading on CBOT at 8:20 AM EST. NYSE opens at 9:30 AM EST. So before the open of NYSE, this one hour and ten minutes of Dow Futures trading usually provides professional traders, financial managers and financial reporters good idea of the market sentiment for the day.

Just multiply the value of the Dow Jones Industrial Average (DJIA) with $10 in order to find the market value of the Dow Futures. For example, suppose the DJIA is at 8500 points, a single Dow Futures contract will have a value of ($10)(8500)= $85,000. In other words, the value of the Dow Futures contract increases/decreases by $10 for every point increase/decrease in the DJIA.

Futures traders can use this in build leverage of 10 in their benefit by going long or short in anticipation of a major move in DJIA. So if a futures trader believes that the NY stock market is going to rally huge, he can take long position in Dow Futures and make a huge profit in case his optimism turns out to be true.

You can purchase futures contract on margin meaning the capital requirements are much lower. Any homeowner can grasp the concept of leverage. You can buy a $200,000 home with a much lower payment like 10% or $20,000. Index futures like Dow futures work in the similar fashion. The CBOT began trading on its electronic platform in April 2002; a mini sized Dow Futures contract valued at $5 times the average. It has grown quickly in popularity, although the mini sized Dow futures contract hasnt matched the popularity of the CME E-min stock index contract like the E-mini S&P 500 Futures contract.

The Dow Index was first published in 1896 comprising 12 smokestack companies. DJIA grew to encompass 30 large industrial companies and became a popular business barometer. DJIA accounts for about 20% of the market value of all US equities. Dow Jones Industrial Average (DJIA) is an index of 30 largest and most liquid blue chip stocks traded on the New York Stock Exchange (NYSE). The average is maintained by the editors of the Wall Street Journal. Unlike the S&P 500, DJIA is a price weighted index.

Today DJIA is the most widely quoted market indicator in newspapers, radio, television and electronic media around the world. Movement in the DJIA is sensitive to the news surrounding the 30 companies represented in the index particularly that with the highest prices as Dow is a price weighted index.

Its not surprising that some of the most popular futures contracts are related to equity markets. Most countries with a vibrant stock market also have a futures contract on a stock index that represents that economy.

Stock-index futures are an integral part of the stock markets daily activity. Currently more than 70 stock-index futures contracts are traded on at least 20 exchanges around the world.

For example in US, futures contracts are available on the Dow Jones Industrial Average (DJIA) as well as the broader Standard & Poor (S&P) 500 Index and the technology oriented NASDAQ-100 index known as Dow Futures, S&P 500 Futures and NADAQ-100 Futures.

Similarly United Kingdom (UK) has FTSE-100 futures contract on its famous FTSE-100 index, Hong Kong Hang Seng Futures Contract on its famous Hang Seng Index, France CAC 40 futures contract on its CAC-40 index and Dow Jones Euro STOXX 50 covers selected stocks in the euro economy.

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Trade Dow Futures. Learn Swing Trading!

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