Dow Jones Trading

The Dow Jones Industrial Average is one of the best-known stock market indices that track the performance of 30 large U.S. blue chip companies listed on NASDAQ and NYSE. The name comes from Charles Dow and Edward Jones, who created it in 1896. The index has been used for over 100 years by stock market analysts to measure the strength of the U.S. stock market and the overall health of the economy.

When the index was created, it included the listings of 12 publicly traded industrial companies that operated in the railroad, sugar processing and oil industries, among others. Although these businesses seem outdated today, they were revolutionary in the early 20th century, and the popularisation of railroads contributed to one of the speculative bubbles. Similarly, Sugar's stock was famous among speculators for its enormous volatility. Sugar did not become a widely used additive in the food sector until the 20th century, when Hershey's created the first sugar bar in 1900, which contributed to the high volatility of sugar-related stocks.

Today, the Dow Jones Index has changed beyond recognition, with technology companies like Microsoft and Salesforce listed on it, as well as oil and gas companies such as Chevron. However, the index is still called industrial, also due to its industrial origin.

Let's take a look at how the index is structured today and what makes Dow Jones (US30) so popular among traders and investors.
What is Dow Jones and how does it work?

Dow Jones is one of the most popular American indices of 30 prominent stocks listed on NASDAQ or New York Stock Exchange (NYSE).

The composition of the If a company declines or loses a key role in the economy, it may leave the index Dow Jones Index changes as the U.S. economy evolves. and a new company may join it. The index excludes companies in the transportation and public sectors.

A company whose stock is losing value (declining capitalisation) due to declining earnings or financial performance may leave the index, losing its blue-chip designation. Stocks with higher stock valuations weigh the most in the index. This means that an increase in the valuation of a company that has a higher weighting in the index will raise the value of the index much more than an increase in a company that only slightly adds to it.

Historically, when looking at the Dow index, its co-founder Charles Dow would add the prices of all 12 stocks making up the index and then divide by twelve - calculating the index value from this. However, this proved problematic in the face of 'corporate actions' such as stock splits and share issues.

Nowadays, the index has a fixed divisor and is used for one point movement of each of the 30 listed companies in the index. The value of the divisor fluctuates and as of June 20 oscillates around 0.151. The Dow Jones is therefore a weighted arithmetic average - unlike the S&P 500, it does not reflect the market capitalization of its constituent companies.

Rather, the Dow represents the sum of the prices per share of all 30 companies divided by the divisor. A change of X points in any of the stocks in the index causes the index to change by exactly the same number of points.

The formula shows it this way:

Dow Jones index value = share prices of 30 companies / fixed division
Which companies make up Dow Jones?

The index is composed of so-called blue-chips, i.e. companies which boast stable, predictable and growing earnings and are key in their industry. Currently, the index includes McDonald's and Wal-Mart, as well as technology companies such as Cisco, Salesforce, Apple, Microsoft and Walt Disney.

In 1997 the index included Wal-Mart, Hewlett Packard, Johnson&Johnson and Traverelrs Group.

In 1999, Intel, Microsoft, Home Depot and SBC Communications debuted in the index; Chevron and Goodyear, among others, left the index.

In 2020, ExxonMobil, Pfizer, Honeywell, Salesforce, Amgen and Raytheon Technologies debuted.

Looking historically at the most prominent stocks in the index, McDonald's has been in the index since 1987, Apple since 2015, IBM since 1979, and Intel since 1998. JP Morgan debuted in 1991 along with Catterpillar and Microsoft. Proctor&Gamble's stock has held up the longest (since 1932).
Type of positions on Dow Jones

When you want to start trading the Dow Jones index, there are two positions you can take: a short position or a long position. It is important to remember that major news that may affect the health of the economy tend to spike market volatility and the Dow Jones index is of course sensitive to it. The position you choose to take will, therefore, depend on your outlook for the overall health of the economy and the direction of consumers and investments volume.
Long position on Dow Jones

A long 'BUY' position is particularly popular when the market is in a good mood and investors feel safe or when there are external circumstances that can bring positive sentiment back into the market. This is when a rebound can be particularly dynamic.

In such a situation, if you assume that the economy may experience an improvement in investor sentiment following an economic or political event, you can take a long position on the Dow Jones. Usually risk-loving investors return quickly to their investments once the sun comes out for the market again.

If market sentiment indeed improves, your prediction will be correct and you would make a profit betting on the price increase of the Dow Jones (US30) index. Conversely, if you were to take a long position and the market fears a downturn, your position would record a loss.
Short position on Dow Jones

A short ‘SELL’ position is especially popular when there is fear and uncertainty in the market or when there are external circumstances that could cause negative sentiment to return.

In such a situation, if you assume that the economy may experience a sharp deterioration in investor sentiment following an economic or political announcement, you can take a short position on the Dow Jones (US30). In this way, you can play out trading strategies for specific world events that could increase or significantly decrease asset price volatility.

If fear is indeed present in the market, your prediction will be correct and you will make a profit by betting on a decline in the price of the Dow Jones index. Conversely, if you take a short position but the market will still rise, your position will record a loss.
Best time to start trading Dow Jones

The Dow Jones index tends to make much smaller price movements than other US indices due to the nature of the large companies listed on it. These are mostly companies with a long history, which have some kind of leadership in the sector, like Microsoft, Chevron or McDonald’s. Due to this fact, in periods of panic or unstable situations in the world, Dow Jones loses less than other US indices. However, investors usually leave any risky assets for some time and turn to more stable investments or cash.

The Dow Jones index is also prone to dynamic price rebounds when positive sentiment returns to the market. This can be attributed to macroeconomic factors that are causing investors to return to investing in the best Wall Street business. Companies which are listed on Dow Jones are creating the core of the US economy. Sometimes large capital returns to less riskier stocks first so indices like NASDAQ or Russell 2000 can be even a few steps behind the Dow Jones growth when indices rebound. Dow Jones provides high but not as high as NASDAQ returns, and it has a less risky model (Risk/Reward Ratio works).

It is certainly a good time to be interested in Dow Jones index trading during panic periods, which cause a strong sell-off of shares of large companies that have been providing good business solutions for decades. A large number of contrarian investors looking for a trend reversal may take important long 'BUY' positions in anticipation of a price rebound. Similarly, in the case of euphoria when the index is at historic highs, risk averse traders may look for a period of weakness in global markets to take short 'SELL' positions on the Dow Jones, betting on declines in US economic growth.

Interesting times to start trading Dow Jones are when the largest companies in the index release their quarterly or full year financial results, as well as world events that can cause high volatility, such as FED meetings, major political meetings or various military crises.