Dow Jones
Why Trade the Dow Jones?
The Dow Jones Industrial Average (DJIA) has demonstrated remarkable movements over its 120-year history, making it a prime asset for traders and investors seeking to generate additional income.
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What is the Dow Jones Index?
The Dow Jones Industrial Average is a prominent US stock market index that tracks the performance of the 30 largest publicly listed US companies.
History of the Dow Jones Industrial Average
The Dow Jones Index has its roots in 1896, created by Charles Dow and his business partner Edward Jones. It was the second-ever stock market index, following the Dow Jones Transportation Average, which was the first US stock market index.
Originally, the Dow comprised 12 of the largest industrial companies in the United States, focusing on sectors such as tobacco, cotton, railroads, gas, sugar, and oil. By 1928, the index expanded to include 30 of the largest US corporations. Over the years, the index has undergone multiple changes as companies have been added or removed. While many investors consider the Dow a reliable indicator of the US economy's health, some critique its relevance, noting that many top firms generate significant revenues from outside the United States.
How Many Companies Are in the Dow Jones Industrial Average?
The DJIA consists of 30 of the largest US companies. Investors often associate a rising Dow Jones with a healthy US economy, while a declining Dow can indicate economic weakness.
The companies within the Dow are weighted differently, with those having higher share prices holding greater significance than those with lower prices. Each stock contributes a unique percentage to the index's overall value, resulting in a price-weighted index. Historically, companies have been removed from the Dow when their market capitalization significantly declined, making way for better-performing firms.
Critics of the Dow’s price-weighting method argue that it is flawed, as it does not account for a company’s market capitalization. This approach can lead to situations where firms with lower stock prices but higher valuations receive less weight than those with higher stock prices but lower market capitalizations. Consequently, there are calls for recalculating the Dow based on each company's overall valuation.
Dow Jones Chart Analysis
Dow Jones chart analysis involves a comprehensive examination of the index’s price movements over time, with the goal of identifying trade opportunities that strike a favorable balance between potential losses and gains.
Key Indicators for Dow Jones Analysis
Several indicators are commonly used to analyze the Dow Jones chart, including the 200-day moving average (DMA). This indicator helps determine whether the index is in an uptrend or downtrend.
Moving Average Calculation
The moving average is calculated by summing the closing prices of the index over a specified period (e.g., the past 200 days) and dividing that total by the number of days. Short-term traders often use the 20-day and 50-day moving averages to identify trends that develop over weeks.
Long-term Trading
Long-term traders typically rely on the 100-day and 200-day moving averages to guide their investment decisions. They may initiate bullish trades when the Dow trades above both moving averages and take bearish positions when it falls below them.
Swing Trading
Swing traders tend to use the 50-day and 100-day moving averages to identify potential bullish and bearish setups. Short-term traders, on the other hand, favor the 50-day and 20-day moving averages to align their trade setups with their specific trading style.
Best Broker for Trading the Dow Jones Industrial Average
When choosing a broker for trading the Dow Jones Industrial Average (DJIA), it's essential to select one that allows you to profit from both rising and falling prices. WisunoFX is an excellent choice, as it enables traders to do this without significant margin requirements.
Low Capital Requirements
With CFDs mirroring the index, you don’t need a substantial account balance to trade as you would with a traditional stockbroker. For instance, if the Dow is trading at 34,000, a typical stockbroker might require a minimum account balance of $70,000. In contrast, WisunoFX allows you to start trading the Dow Jones with a minimum balance of just $200, enabling you to trade fractions of the index rather than the entire index.
Cost Efficiency
Unlike traditional brokers that charge commissions on all trades, WisunoFX only charges a spread on Dow Jones index trades. This means you can avoid punitive commissions that could significantly erode your profits as a retail trader.
Flexible Trading Hours
WisunoFX offers the advantage of trading Dow Jones CFDs 24 hours a day, five days a week, providing more trading opportunities compared to traditional brokers, which are restricted to regular market hours.
FREQUENTLY ASKED QUESTIONS
The points on the Dow Jones refer to the whole numbers representing its value and the changes that occur over time. For example, if the Dow moves from 33,200 to 33,250, that indicates a 50-point change. A 1-point move in the Dow has a lesser percentage impact compared to a 1-point move in the S&P 500 due to their differing valuations.
It is unlikely that the NASDAQ will surpass the Dow, as the Dow tracks the 30 largest companies in the United States, including some of the largest stocks in the NASDAQ. However, it’s important to note that there are no guarantees that the approximately 3,300 stocks in the NASDAQ will consistently be less valuable than the 30 stocks in the Dow.
Each of these major stock indices has distinct criteria for including companies. For instance, the S&P 500 requires companies to have a market capitalization of at least $11.8 billion, high liquidity, and at least 10% of their shares publicly listed.
The best strategy for trading a market crash in the Dow Jones is to sell the index by opening short positions. Always use a stop-loss order to limit potential losses and protect against unexpected price spikes in the opposite direction.
As of mid-May 2021, the DJIA's market capitalization was over $9.9 trillion, a figure that fluctuates with daily price changes. It is calculated by adding the valuations of each of the 30 companies that make up the index.
The trading symbol for the Dow varies by broker, as the term "Dow Jones Industrial Average" and its acronym "DJIA" are trademarked. Most brokers refer to the Dow as "Wall Street 30" or similar names.
Shorting the Dow Jones can be profitable when prices are falling, allowing traders to capitalize on downtrends. However, all trading carries risks, particularly shorting strategies, since markets generally trend upwards over the long term.
Yes, the Dow Theory remains relevant today and forms the foundation of modern technical analysis. It is based on the premise that a stock's price reflects all available information, a concept that continues to hold true.
You can invest in the Dow Jones Industrial Average by purchasing the index directly through a stockbroker, though this requires a substantial investment. Alternatively, you can trade its CFDs via a Forex broker or invest in ETFs and Options through a stockbroker.
The S&P Dow Jones Indices company is responsible for determining which companies are included in the Dow.
The criteria for inclusion in the Dow Jones are not straightforward, but the primary objective is to accurately represent the U.S. economy.
While some may argue that the Dow Jones Industrial Average has reached bubble territory, this remains a matter of opinion. What is clear is that the Dow recently hit new all-time highs and has a history of breaking such highs throughout its existence.
On January 19, 2017, the DJI Average was trading at 19,804.72, just a day before President Donald Trump took office. The Dow has since risen to a new all-time high of 35,084 on May 10, 2021.
