What are Dow Futures?

At Shadowtraders, we have found that traders actively search for financial instruments that they can trade. Opinions differ dramatically about which instruments are good for trading. Should they trade short or stay in for the long haul? Should we trade shares of stock, invest in options, or trade futures?

Individual investors feel most comfortable about buying shares of stock and holding for the long-term. That is the trading sentiment most traders subscribe to -- buy/hold/sell. For those investors unfamiliar with doing their own research and selecting specific stocks, they can buy/hold/sell mutual funds that trade a variety of stocks at once.

Before investing, the important question each investor must ask is, "what are my investment goals?" Am I a conservative trader, worrying about capital preservation? Am I an agressive investor, willing to take more risks with the potential of larger rewards. There are many things to consider when deciding your financial goals, such as age, amount of money available to invest, etc. Having a buy/hold/sell inclination works great when the Market is steadily going up, such as in a Bull Market. But when the Market is downtrending, as in a Bear Market, buy/hold/sell investors sit on the sidelines, unable to capitalize on the Market's direction or transfer their assets to bonds for security.

2008 saw the Market bring in the Bear Market. Most traditional investments lost their value. Pundits on financial news networks talked about "investing for the long haul". Unfortunately, afraid for their portfolio, many investors sold and either sat on the sidelines licking their wounds or did transfer what was left of their assets to more risk-adverse instruments. Many investors were told by their brokers to "Dollar Cost Average". "If you liked it at $50, you will really like it at $25," and you should be buying as it goes down.

While the traditional buy/hold/sell trading strategy certainly has its place, investing with a more diversified philosophy can help you take advantage of financial market movements. For this reason, Shadowtraders recommends taking a look at Dow Futures trading.

The Dow Jones Industrial Average (DJIA) is, by far and away, one of the most heavily monitored stock indexs worldwide. The index consists of a wide variety of top 30 blue chip stocks traded on the New York Stock Exchange (NYSE). The stocks that make up the Dow are the most well recognized companies. Here's the problem, however...you cannot trade an Index.

To resolve this issue, the Chicago Mercantile Exchange (CME), created a "derivative" that you can trade, the Dow Futures Contract. What is a derivative? A derivative is any instrument that gets its name and value from an underlying asset. In the case of the Dow Futures Contract, the underlying asset is the DOW Index, hence the name. The value of the contract goes up or down based upon the value of the DOW Index.

How do you compute the value of the DOW Futures? The DOW futures contract trades at 10 times that of the Dow Index. What does that mean? Say the DOW is trading at 11,000. Then the value of the DOW Futures contract will be $110,000 (11,000 x 10 = $110,000). The DOW Futures contract is traded by the larger institutions and hedge funds. There is also a smaller version of the DOW Futures contract tailor made for individual investors...the Emini DOW Futures. This contract trades at 5 times that of the Dow Index. That means if the Dow is at 11,000, then the value of the contract is $55,000 (10,000 x 5 = $55,000). Each point move in the DJIA equals $10 in the DOW Futures contract and $5 in the Emini DOW Futures contract. When the Dow moves 50 points by the end of the day, that equates to $500 in the $10 DOW futures contract.

DOW Futures have built-in maximum leverage, allowing traders to make more money on price fluctuations than they would by purchasing stocks outright. Were you to buy 100 shares of all 30 DOW stocks outright, even with a 50% margin (the most provided for stocks), you would still need over $50,000. Now compare that to the $500 needed to participate in the same 30 stocks with one DOW futures contract. Mind you, the greater the leverage, the better the potential profit but the greater the risk of loss as well.

DOW futures are NOT suitable for everyone. Trading DOW Futures involves risk of loss that, in some cases, could be substantial. For this reason, Shadowtraders recommends that beginning traders get solid trading training before trading live. You need to know just how the DOW Futures trades and the exact risks involved before you put your money on the table.

The Dow Futures trade pre-Market (before 9:30am EST when the NYSE opens), enabling investors to place their positions long before the stock tprofessionals can get an idea of that day's Market sentiment. Companies report before the Market opens as well. Should a company report well, causing the Dow Futures to rise, early morning Futures traders get to take advantage of the rise instead of having to wait until 9:30.

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