How to Trade Dow Jones Index Futures

Futures contracts such as the E-mini Dow enable just about anyone to trade or invest in the Dow Jones Industrial Average (DJIA), the most iconic stock index in the world. The Dow tracks 30 blue-chip U.S. stocks from nine sectors, ranging from industrials to health care to consumer staples.

The Dow is often considered synonymous with "the stock market," though the S&P 500 Index, which is comprised of 505 constituents, more broadly represents the U.S. equities market. Still, Dow index futures are a popular tool for getting broad-based exposure to U.S. equity or hedging such positions.

Key Takeaways

  • Dow Jones futures contracts enable just about anyone to speculate on whether the broader stock market will rise or fall.
  • Dow futures contracts can be traded on leverage, meaning you only need to put up a fraction of the value of the contract.
  • Dow futures markets make it much simpler to short-sell the broader stock market than individual stocks.

Futures Trading Basics

A futures contract is a legally binding agreement between two parties in which they agree to buy or sell an underlying asset at a predetermined price in the future. The buyer assumes the obligation to buy and the seller to sell. And the value of the underlying asset—in this case, the Dow—will usually change in the meantime, creating the opportunity for profits or losses.

Some commodity futures contracts still require actual physical delivery of the underlying product in question, such as bushels of corn, but that is not the case with Dow and other financial market futures, which were created to allow traders to easily hedge risk and speculate for profit. They can be settled for cash.

Trading the Dow With Futures Contracts

Put simply, DJIA futures contracts enable traders and investors to bet on the direction in which they believe the index, representing the broader market, will move. That simplicity, the high trading volumes, and the leverage available have made Dow futures a popular way to trade the overall U.S. stock market. About 200,000 E-mini Dow contracts change hands every day.

There are now two Dow futures contract sizes available, both of which trade on the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME). The E-mini, or mini-Dow, contract, as noted above, represents $5 per tick on the DJIA. The Micro E-mini is one-tenth the size of the E-mini, and represents 50 cents per point with a margin requirement of about $800, as of January 2022.

In addition to the front month, Dow futures are listed quarterly, with expirations in March, June, September, and December. These contracts are cash-settled, meaning that delivery is made in the equivalent value of the index rather than in the stocks that make up the index itself.

Trading Hours

Unlike the stock market, financial futures trade six days a week, Sunday through Friday, and nearly around the clock.

  • During regular U.S. stock market trading hours, the DJIA futures contract price very closely tracks the index value.
  • When the U.S. stock markets are closed, these index futures may continue to trade in after-hours sessions. These prices, which continue even while the underlying component stocks are closed, can be influenced by economic data releases or monetary policy decisions in other countries or geopolitical events.
  • Dow trading hours include: 8:30 a.m.—3:00 p.m.; trading halt from 3:15 p.m.—3:30 p.m.; CME Globex Trading resumes 3:30 p.m.–4:15 p.m.; Trading resumes on CME Globex 5:00 p.m.–8:30 a.m.

Using Leverage in Trading

One of the most attractive features of futures contracts is leverage. A trader can buy an E-mini Dow contract for about $5,500—and that futures contract is worth $5 for every point on the DJIA. So if you buy when the index itself is at 29,000, and sell when it hits 30,000, you've made $5,000 on the trade, nearly doubling your money.

Beware, though, that leverage cuts both ways, magnifying losses as well as gains. A drop of 1,000 points on the Dow would nearly wipe out your $5,500.

Opening a Futures Trading Account

The first step to trading Dow futures is to open a trading account or, if you already have a stock trading account, to request permission from your brokerage to trade futures. Most major brokerages such as E*Trade, TD Ameritrade, and Interactive Brokers offer stock index futures. They generally charge a commission when a position is opened and closed.

Key considerations when choosing a broker are the ease of the trading platform, commission charges, customer service, and features such as news and data feeds and analytical tools such as charts.

Select a Futures Trading Strategy

After selecting a broker and depositing funds into a trading account, the next step is to download the broker's trading platform and learn how to use it. You don't want to get caught attempting to make quick trading decisions in a volatile market before you are proficient in using your trading software.

Test your trading strategy before you start risking your hard-earned money.

Once you know your trading platform, select a trading strategy and test it using a demo or trade simulator account. Only begin live trading with real money after you have a strategy that is consistently profitable in simulated trading. This is even more important when trading with highly leveraged instruments such as futures.

With futures trading, you can buy long or sell short with equal ease. Futures markets aren't burdened with the same short-selling regulations as stock markets. If you expect the DJIA to go up, buy a futures contract; if you expect the index to decline, sell one short. Take a position in the futures contract trading month you want to trade—the one with the closest expiration date will be the most heavily traded.

Futures Margin Requirements

When you open a position, the broker will set aside the required initial margin amount in your account. To hold the position, you must maintain sufficient capital in your account to cover the maintenance margin. The maintenance margin is lower than the initial margin requirement.

If your account value dips below the maintenance margin level, you will receive a margin call from your brokerage that will require you to liquidate trade positions or deposit additional funds to bring the account back up to the required level.

Closing a Position

Close an open trade simply by entering an opposite order. For example, if you opened the trade by buying five E-mini Dow contracts, you would close the trade by selling them with the same futures contract expiration date. If you opened by selling five contracts short, you would need to buy five to close the trade.

It is also possible to partially close out of a position if you have more than one contract—for example, selling three of five contracts originally bought, leaving a position of two contracts open.

Article Sources
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  1. Federal Reserve Bank of St. Louis. "Dow Jones Industrial Average (DJIA)."

  2. S&P Dow Jones Indices. "Characteristics."

  3. CME Group. "E-mini Dow ($5) Volume."

  4. CME Group. "Micro E-Mini Dow Jones Industrial Average Index."

  5. CME Group. "Frequently Asked Questions: Micro E-mini Equity Index Futures."

  6. Charles Schwab. "What Is a Micro E-Mini Future?"

  7. CME Group. "CME Group Equity Index Products, Changes to CME Globex Trading Hours and Daily Price Limits."

  8. CME Group. "Dow Jones Industrial Average (DJIA) Futures and Options," Page 3.

  9. TD Ameritrade. "Margin Handbook," Page 3.

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