How to Day Trade the Dow Jones?

January 28, 2022
by Leon Marshall,

Article Recap

One of the oldest US stock indices, the Dow Jones Industrial Average contains 30 of the largest US-based stocks traded on the New York Stock Exchange and the Nasdaq. Find everything you need to know in the article below.

One of the oldest US stock indices, the Dow Jones Industrial Average contains 30 of the largest US-based stocks traded on the New York Stock Exchange and the Nasdaq. Because of the types of companies represented by the Dow, it is called the ‘blue chip‘ index. The Dow Jones index is often viewed by day traders as an indicator of market bias, which makes the prospect of short-term positioning more foreseeable. It has been nine years since the Dow has experienced a bull market, so short-term traders can glean a directional bias which can help with day-to-day positioning.

Established by Charles Dow and Edward Jones in May of 1896, the Dow Jones Industrial Average is the second-oldest stock index in existence. At the time, Dow was a Wall Street Journal editor, and Jones, a statistician, was looking for a simpler way to track market performance. Dow and Jones based their first index on railroads in 1886, but with an increasingly industrialized economy, they sought a better way to gauge market performance and developed the Dow Jones Industrial Average based on 30 industrial stocks. There is no longer a connotation of industrial companies in the index as it now includes tech companies like Apple, IBM, and Intel as well as pharmaceutical companies like Merck and Pfizer.

Main trading signals for the index

Since the Dow Jones Industrial Average tracks 30 of the biggest, most established companies in the US economy, it remains an attractive index for investors who prefer blue-chip stocks. As we’ve seen in US stocks over the past nine years since the Global Financial Collapse, such trends can be attractive when they appear across an asset class. Traders can use this to determine a market’s bias so that shorter-term day trading strategies can be geared toward its direction.

To predict the direction that an index will go in with trading, you need to study the charts and perform adequate analysis. Despite the fact that there are only 30 companies, it is not worth analyzing each separately and then combining the results. Technical analysis predicts well how the Dow will perform as a composite price. The price of the index is looking for support and resistance at whole numbers such as 10,000, 11,000, and 12000, despite the fact that it consists of many different stock values.

As a trader, another advantage is that you are already exposed to many companies when you trade an index such as the Dow; you are protected from wild swings associated with individual stocks, but still have exposure to the economy.


Factors moving Dow’s price

Dow’s price is affected by several technical and fundamental factors related to the US economy. In addition, the Federal Reserve’s monetary policy, foreign exchange rates, earnings reports, commodity prices, and major developments in the economy usually have an impact on the price. Prices are also affected by trade wars, such as the US-China one. It is not certain that these drivers will always move the indices in the desired direction. Thus, traders would be wise to consider how these factors work together rather than just analyzing one factor.

Traders often measure or grade trends by using the 200 Day Moving Average. The 200-period moving average is simply applied to the Daily chart, and when the price of an asset is above this level, traders can consider bullish strategies on shorter-term trading setups. The opposite happens whenever prices cross below this level; traders then have the opportunity to adopt bearish strategies under the assumption that prices may continue to lower.

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The importance of a strategy when trading 

It is not easy to day trade the Dow Jones, and most beginners fail. There’s much more to day trading than just guessing which direction a stock or index will move, and hoping it comes true.

There will always be uncertainty in the future; the goal of a trader’s analysis is to get the odds on their side, even if only slightly. It is inevitable that losses will occur, and if left unchecked, a single loss can wipe out countless winning trades.

Although winning percentage is a crucial metric for a trader, it’s far from the only one, since factors such as risk-reward also play a major role in whether or not a trader will survive the ups and downs that accompany trading in the financial markets. Whether it’s a day trading strategy or a longer-term strategy, traders should look to cut their losses short and let their winners run.

Final tips for trading Dow

Markets in the United States open at 9:30 AM and close at 4 PM Eastern Time, resulting in a more active trading period for the Dow Jones Industrial Average and its constituents. Dow Jones remains accessible not only during market hours but also during off-hours through futures contracts and CFDs. CFD markets resemble futures markets in that they are open 23.25 hours per day, allowing traders to trade the Dow around the clock. The most liquid part of the day for the Dow typically occurs during US market hours, when both individual stocks and ETFs, as well as futures markets, are trading.

For day traders, trade management is a major concern. In order to minimize their initial investment risk, traders can consider strategies such as break-even stops or scaling out of winning positions, while at the same time affording the opportunity to exit from a profitable position at increasingly favorable rates.

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Trading on margin is high risk. 

All times are AEST.