intro – dow futures:
Dow Futures is the commonly used term for Dow Jones Industrial Average Futures contract. All of the Dow futures are a product of the Chicago Mercantile Exchange (CME). The value of Dow Futures contract depends on the future expected value of Dow Jones Index. Therefore, this value is determined on the exchange through buy and sell orders by market participants.
Dow Jones is the stock index of top 30 companies listed on stock exchanges in the US. It is maintained by S&P Dow Jones Indices LLC, a joint venture between S&P Global, the CME Group and News Corp.
features of Dow Futures contract
Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange and therefore benefit from high liquidity. However, this comes at the price of not being able to create a bespoke product for the buyer. There are OTC(Over The Counter) Forward contracts that allow this. However, we will focus on the Futures contract for the purpose of this article.
Dow Futures expire quarterly (March, June, September, and December). And, they are traded up until the expiry date at which point, they can either be settled or rolled over. Since Dow Futures are a financial futures contract, they are cash settled upon expiry at either a profit or loss.
Institutional traders usually roll their positions prior to expiration to maintain their exposure to the market. They might do this because they may have offsetting OTC forward contracts that they have created for their customers. There are also opportunities to profit from pricing anomalies during these rollover periods.
Dow Futures have a multiplier that multiplies the value of the contract to add leverage to the trade. The multiplier for the Dow Futures is 10. For instance, if the Dow Futures are trading at 25000, a single futures contract would have a market value of $250,000. For every 1 point the Dow Jones Industrial Average fluctuates, the Dow Futures contract will increase or decrease $10. So, by using leverage, a trader could make substantial profits from small movement in the Dow Jones. However, at the same time be exposed to large losses, if the market went the other way.
e-mini Dow futures
The purpose of E-mini Dow Futures is to create a smaller contract size, that allows retail traders and individual investors to speculate in Dow Futures without maintaining significant margin balance. E-mini Dow Futures contract’s minimum tick is 1 index point = $5.00. Micro E-mini Dow Future is one-tenth the size of the E-mini, and represents 50 cents per index point. Consequently, a micro e-mini Dow Future requires an even smaller margin account balance to participate in the market.
These smaller contracts allow for high liquidity in the market and hence a more efficient price determination. As of 2020, the volume of Dow Futures E-mini contracts is about 200,000 a day. They trade 6 days a week, from Sunday to Friday and have also enabled a 24 hour CFD market, since the out of hours CFD price closely follows the Futures market.
variables and factors to monitor
dollar(USD) rate in fx markets
Firstly, as USD appreciates in value, this causes a drop in foreign investment, since foreign investors get less USD for their currency. Hence, large global investors will not use their USD reserves to buy US stocks. But, convert USD into their local currency as they will get more of their local currency per US Dollar. On the other hand, depreciation of USD will make Dow stocks cheaper. Hence, the Futures will be expected to rise in this scenario.
Secondly, higher inflation means depreciation in the value of USD and that the US companies are able to sell their goods and services at higher prices. Therefore, the futures, that are close to expiry will rise, as companies are bringing in more cash. However, this will then, translate to higher employee wages and higher cost of goods and raw materials. Hence, high inflation over a sustained period of time, will cause longer dated Futures contract to drop in price.
Thirdly, short and medium term interest rates spike will impact the Futures market. This is because higher rates will mean a (relatively)risk free alternative to stocks – a more risky asset, in the short term. Hence, this will cause Futures contracts, that are close to expiry, to drop. However, long term high rates will lower bond yields and therefore, the large investors’ money will move to stocks, causing longer dated Futures price to spike.
and the rest
Finally, other factors such as unemployment rate and PMI(Purchasing Managers Index) also impact Dow Futures. For instance, high unemployment rate will imply lower disposable incomes. Consequently, this will lead to a drop in consumer demand and this would cause a downward trend for stocks. In contrast, a higher PMI in the US will mean an increase in economic activity, leading to higher employment and a high demand for goods and services produced by Dow Jones companies.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily prediction using algorithms based on all factors that impact Dow Futures price and evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.