Taking the leap into futures trading moves you into an arena of fast-paced action where the potential profits -- and losses -- are more extreme than you will experience in the stock market or trading exchange-traded funds. Dow Jones Industrial Average futures let you make short-term trades based on your expectations of the next move in the DJIA. If your analysis is correct, every one point move in the DJIA will add $5 or $10 to your futures trading account balance.
Futures Trading Account
To trade DJIA futures you need an account with a registered commodity futures broker. Although some stock brokerage firms are also registered as futures brokers, most futures brokers are specialists in futures trading. A broker should provide you with live or online training on how to trade futures, a trading system for your computer with assistance setting up the software to trade the DJIA futures, and a live, registered broker you can call when you have questions. Most brokers offer free practice trading accounts so you can try out the services before committing real money to a specific broker.
DJIA Futures Features
A futures contract on the DJIA is valued at a designated multiple of the stock index. Three different DJIA futures contracts are available valued at $5, $10 and $25 times the stock index. So with the Dow Jones at 14,000 points, the standard DJIA ($10) futures contract would be worth $140,000. Each DJIA futures type has four contracts currently trading with contract dates at the end of March, June, September and December. As a trader, you will most likely trade the nearest month's contract and roll any open positions to the next contract as the contract date approaches.
Trade Nuts and Bolts
You can trade DJIA futures to profit from either a gain in the Dow's value or a decline. If you think the Dow is going up, you buy -- called a long position -- one or more contracts to open the trade. To profit from a drop you sell -- to be short the DJIA -- contracts to open. The opposite order type -- sell or buy -- closes a position. When you place a trade, the broker will require you to put up a margin deposit. Margin amounts are set by the commodity exchange and in early 2013, the margin for the Dow $10 futures is $5,500, meaning you control a $140,000 futures contract for $5,500. The minimum change in the Dow futures value is one Dow point, which is worth $10. So if you went long a DJIA futures contract, and the Dow gains 50 points, your profit would be $500 on your $5,500 investment to open the trade.
Strategy and Practice
The profitability of your DJIA futures trading depends on your strategy for picking entry points and the direction of the Dow. Your broker can provide some information on strategies, but you must develop a strategy that fits your personality, account value and time you have available to trade. Included with your real money brokerage account will be a practice account that you can use to trade without putting any money at risk. Use the practice account to learn how the trading software works and to refine your trading strategy until you are consistently profitable. Do not jump into real-money trading until you have developed the skills and confidence to trade profitably with the practice account.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.