How to Trade the Dow Jones Industrial Average Index: A DJIA Trading Guide

Market indices may provide significant trading opportunities for traders and eliminate the need to trade numerous individual financial assets within a specific market segment. By trading a single index, traders can gain direct exposure to the entire array of assets in a market segment.

A prime example of such an index, with global recognition, is the Dow Jones Industrial Average (DJIA) index. This is due to its major stock constituents and high trading volume which offers ample liquidity for traders.

Main Points

• The Dow Jones Industrial Average is a price-weighted index of 30 blue-chip companies listed on the major US Stock Exchanges
• For over 100 years, the Dow Jones Industrial Average has been used as a bellwether of the US stock market and the overall US economy
• The Dow itself is just a number, not a tradable asset, however financial instruments like USA 30 CFD and SPDR ETF CFD, provide exposure for traders to buy and sell the index using leverage
• The index can be traded during the market hours of the major US stock exchanges, including its pre-market and after-market hours
• Having a solid trading plan is essential to trading the Dow

Understanding the Dow Jones Industrial Average

If you ever felt overwhelmed by the seemingly different terms: “The Dow", "Dow30", "Dow Jones Industrial [DJI]", "US30", "USA 30”, or “Wall Street 30”, don't sweat it. They all refer to the DJIA.

What Is the Dow Jones Industrial Average?

The DJIA is a price-weighted index of 30 blue-chip companies listed on the major US Stock Exchanges including the New York Stock Exchange and the NASDAQ. It is one of the world’s most quoted equity benchmarks used to gauge the overall health of the American stock market.

Founded in the mid-1880s and first published in 1896, the DJIA owes its name to its creators, Charles Dow and Edward Jones.

What Is USA 30 Index?

The USA 30 also known as US30 is a CFD derivative that tracks the price of the Dow Jones Industrial Average allowing traders to buy and sell the Dow Jones index (DJI) without actually owning any of its shares. It is known by its ticker symbol ‘USA 30 - Wall Street YM’ and is represented in real-time based on the Dow price.

What Is the Wall Street 30 Index?

USA 30 or US30 is often called "Wall Street 30," because the creator of the index, Charles Dow, is also a co-founder of The Wall Street Journal.

This strong historical connection with Wall Street, a symbol of the American financial markets, along with the DJIA composition of leading companies listed on US stock exchanges, notably the New York Stock Exchange situated on Wall Street, explains why the DJIA is commonly referred to as "Wall Street”.

Constituents of the Dow Jones Industrial Average

Now that you have a grasp of the names associated with the DJI, it may be beneficial to get acquainted with the leading companies that comprise the index.

You might think the DJIA tracks the 30 biggest US public companies by size, but that's not quite right. The index focuses on industry-leading companies across various industries like finance, pharmaceuticals, and technology. As of January 28, 2024, here are the Top 10 companies featured in the DJIA Index and ranked by market capitalization.

What Is the Significance of the Dow Jones Industrial Average?

The DJIA may be important to traders for various reasons, and here are the main ones;

1. The DJIA is not only one of the oldest indices, but it is also one of the most watched indices in the global financial market.
2. The index is home to industry-leading companies by market cap including Apple (technology), ExxonMobil (energy), and The Walt Disney Company (entertainment).
3. For over 100 years, market participants including traders, investors, and stock market analysts have used the index as a measure of the strength of the US stock market and the US overall economic conditions.

If you have ever turned on the news and heard, "The markets are up (or down) today"? More often than not, they're referencing the Dow Jones Industrial Average – that is how influential this index is.

What Are the Different Ways to Trade Dow Jones Industrial Average?

Despite its influence, the DJIA itself is not a tradable asset but a performance indicator reflecting the combined value of 30 major US companies. However, there are several financial instruments linked to the DJI, offering both liquidity and exposure for traders looking to engage in buying or selling the index. To trade the DJI, traders can do the following:

1. Trade the DJIA Futures
2. Trade the DJIA CFDs
3. Trade the DJIA ETF
4. Trade the DJIA Options
5. Trade the DJIA Individual Shares

1. Trading the DJIA Futures Contract — (E-mini Dow Jones Industrial Average)
   DJIA Futures contracts, or simply “futures” are a type of derivative contract agreement to buy or sell the DJIA at a set future date for a predetermined price.
   
   The main futures contract associated with the DJIA, is the E-mini DJIA. This contract goes by the ticker symbol YMH4. It is the most popular futures contract of the DJIA due to its smaller size and accessibility for retail traders.
2. Trading the DJIA CFDs - (USA 30 CFD - Wall Street YM)
   On our CFD trading platform, the USA 30 CFD also known as US30 CFD, is a shorthand or ticker symbol representing the CFD derivative of the DJIA.
   
   When you trade USA 30 CFD, you are trading Contracts for Differences based on the futures price of the DJIA.
   
   CFD involves speculating on the price movement of the index, where you make a profit or loss from the difference between the entry and exit price of your buy or sell trade.
   
   Trading the USA 30 CFD provides traders with the flexibility to speculate on the price movements of the Dow futures price without the need to deal with the complexities and obligations associated with trading a futures contract.
3. Trading the Dow ETF
   When you trade DJIA ETFs directly, you are dealing with the ETF’s price, which is calculated based on its net asset value (NAV).
   
   Additionally, you can also trade CFDs on DJIA ETFs. For instance, on the Plus500 CFD trading platform, traders can get broad exposure to the entire stock that make up the DJIA by trading the ETF CFD — SPDR Dow Jones Industrial Average Trust (DIA) — a highly reputable ETF that closely tracks the index's price.
   
   However, keep in mind: that trading ETF CFDs may offer lower liquidity and wider spreads compared to the index CFDs. This often makes ETF CFDs a preferred choice for long-term traders.
4. Trading the DJIA Options
   Options directly linked to the DJI, such as the ‘DJX options’ give traders the right but not the obligation, to buy or sell the DJIA options contract on or before its expiry date.
   
   Additionally, CFDs on options are another way to gain exposure to the price movement of the DJI.
   
   This type of trading typically involves using options contracts to speculate on the future price movement of the DJIAfor a profit or loss, akin to speculating on the price movements of a traditional stock option.
   
   You may buy DJIA call or put option CFDs by putting down a small deposit to control a larger position. However, be aware that while leverage can amplify profits, it can also magnify losses beyond your initial deposit, as profits and losses are calculated on the full position size.
5. Trading the Dow's Individual Shares
   If you do not want to have exposure to the entire DJIAbut are interested in trading the specific stocks featured within it, you can opt for CFDs on individual shares from the index. This approach allows you to trade share CFDs with leverage, giving you the flexibility to focus on companies like Apple, Walmart, and The Coca-Cola Company, all of which are part of the DJI.

Steps to Trade CFDs on the DJIA

You can follow these steps to start trading the DJIA on Plus500:

1. Sign up for a trading Account.
2. Access our interactive CFD trading platform.
3. Find the specific DJIA instrument you wish to trade from
   - the instrument category section or
   - the search bar at the top left of the trading platform.
4. Analyse the market to decide if you want to open a long (buy) or short (sell) trade.
5. Adjust your number of contracts.
6. Set your risk management parameters: Take profit, stop loss, trailing stop or limit orders.
7. Click the "Buy" or "Sell" button to open a trade in the market.

DJIA Market Trading Hours

You can trade a range of DJIA financial instruments on the Plus500 platform, including USA 30 CFD, SPDR ETF CFD (DIA), Options CFDs, and Shares CFDs. Trading is generally available 5 days a week, from Monday to Friday, between 23:00 to 00:00 CET, with a daily break at 22:15 to 22:30 CET time. However, trading platforms’ hours and instrument availabilityare subject to each operator.

What Is the Best Time to Trade the DJIA?

The DJIA is mostly traded during the market hours of the major US stock exchanges which is between 3:30 am CET to 10:00 pm CET from Monday to Friday.

At the beginning of the usual stock market hours from 3:30 pm to 5:00 pm CET, the European and US sessions overlap. This overlap period is usually a time of heightened market activity where traders seek to capitalize on the volatility in the price movement of the DJI.

The DJIA may also be traded during the pre-market and after-market hours of the major US stock exchanges.

• Premarket hours [10:00 am to 03:30 pm CET], is the trading period before the regular hours of US stock exchanges.
• After-market hours [10:00 pm to 2:00 am CET], is the trading period after the regular hours of US stock exchanges.

It’s crucial to understand that trading volume may decline significantly during the premarket and after-market hours.

Why Trade the DJIA CFDs with Plus500

Risk-Free Demo Account: Plus500 provides a free and unlimited demo account so you can begin your Dow Jones Industrial Average trading journey.

Cutting Edge trading platform: Plus500 intuitive trading platform ensures you can trade Dow Jones Industrial Average CFDs comfortably on desktop, iOS, and Android devices, anywhere and anytime.

Advanced trading tools: Access to Plus500 advanced charts, technical indicators, and economic calendars helps to make informed trading decisions on DJIA CFDs.

Swift Order Execution: When you trade DJIA CFDs, Plus500 ensures fast and reliable order execution at your precise entry and exit prices.

Competitively priced: Plus500 offers tight spreads when trading DJIA CFDs. Other fees might also be applied.

Leverage: Plus500 provides leverage to amplify your potential returns but this can also amplify losses.

Access your funds: With Plus500, you can access your funds anytime and enjoy a secure withdrawal process.

Safety of funds: Your funds are kept in segregated bank accounts, in accordance with regulatory requirements.

Find out more about the DJIA

How Is the DJIA Calculated?

The DJIA stands out from others like the German DAX 40 (FDAX) or the FTSE 100 (UK 100) because of how it's calculated.

The German DAX 40 index and the FTSE 100 index are weighed by the total market cap of each company, but the DJIA simply adds up the individual share prices of its 30 member companies and uses the Dow divisor to account for changes in share price caused by stock splits or other events thus adjusting the index value over time.

It is often argued that the Dow is less reliable than the S&P 500 index because of how it is calculated. The S&P 500 Index uses market cap weighting which is believed to better reflect a company's size and influence on the market. However, the Dow and S&P 500 have historically moved in sync, suggesting that the difference in weighting methods does not affect the overall performance of the indices.

What Moves the DJIA Price?

The DJIA is a leading indicator of the US stock market. By understanding the factors influencing its weighted price movement, traders can make better-informed decisions. Some of the factors that can move the price of the DJIA are:

1. Dollar Strength: A strong dollar tends to benefit the Dow, while a weaker dollar can negatively impact it.
2. Monetary Policy and Inflation: Loose monetary policies by the Fed Reserve, (lower interest rates) often boost the stock market. In addition, Inflation erodes companies' profits and can also cause a dip in the price of the DJI. For instance, in May 2021, the Dow Jones fell by 681 points as a result of the accelerated inflation rate.
3. Unique Weighting: Unlike other indices strictly based on market capitalization, the Dow prioritizes share price for its calculations. This means high-priced companies, such as UnitedHealth Group, hold more weight than companies with higher market caps, like Apple Inc. or Microsoft. This unique weighting can significantly impact the index's overall direction.
4. Macroeconomic Events: The Dow is known to generally trend upward, but major events like the 2008 financial crisis and the pandemic have caused market dips In the Dow Price.

Developing a DJIA Trading Plan

Traders need a clear and concise DJIA trading plan with precise entry and exit points. Here's a 5-step approach that can help develop a trading plan.

1. Choose a DJIA trading strategy that aligns with your objectives and risk tolerance. It could be day trading, position trading, or swing trading.
2. Master DJIA technical Analysis using Plus500 advanced charting tools and indicators like RSI or Stochastic Oscillators to confirm the Dow’s trends and generate trading signals.
3. Stay informed about economic events that might influence the Dow’s price via our economic calendar.
4. Leverage our trading alert feature to get automatic trading alerts via email, SMS, or push notifications on relevant news or when the Dow reaches specific price points.
5. Lastly, implement a robust risk management plan to help control risk exposure and limit potential losses.

Frequently Asked Questions:

Who Owns the DJIA Index?

As of January 2024, the DJIAis owned and managed by S&P DJIA Indices, a joint venture of S&P Global, News Corp, and the CME Group. The same joint venture owns and manages the S&P 500, including other major US indices.

Is the DJIA Suitable For Day Trading?

For day traders, prevailing market biases in the DJIA can provide ample price swing opportunities. To spot bullish or bearish trends in the price movement of the DJI, traders often use tools like the 200-day moving average and then employ trading strategies in the direction of the prevailing trend.

How Do Companies Get Included in the DJIA?

Companies are chosen for the DJIA based on their financial health, industry leadership, economic impact, and trading liquidity. The DJIA selection committee, which includes Wall Street Journal editors, continuously monitors the market to identify and evaluate potential candidates.

Conclusion

This article has provided you with a comprehensive guide for some of the important factors to consider when trading the DJIA, from its composition and significance to exploring various trading options among other things.

Regardless of your personal preference, whether you choose to trade the USA 30 CFD or the SPDR ETF CFD (DIA) available on the Plus500 trading platform, it is worth noting that they both track the same price of the DJI.

Access our trading platform now to explore the Dow Jones Industrial Average financial instruments.