Trading Dow

Trading the Dow Jones Index

With the world in recovery mode, many are still questioning how the financial markets got so out of control. There are certainly new investment opportunities in the current environment and it’s always a good time to review your portfolio

According to Simon Denham of Financial Spreads, “In all this [market uncertainty] it must be admitted that, while equities remain attractive versus everything else, we have not had a serious pull back for quite some time. The fall through June and early July comes to mind but even this did not seem particularly violent at the time.

“[As we come to the end of 2009] the Dow Jones appears to have some misgivings about remaining a five figure number. The DJIA has now rejected the 10,000 mark three times. Having said that, we are now uneasily pondering the continuation of the rally”.

So to me it looks like the Dow could go either way. But how and where to trade the Dow Jones Index?

One option is spread trading – an increasingly common form of trading. There are a wide range of benefits. The variety of trading options, speed and ease of making a trade are making it more and more popular.

There are downsides to all forms of investing and with spread trading you need to be careful because you can lose more than your initial investment.

Having said that, there is a wide range of markets on offer. You can speculate on thousands of markets from the popular Dow Jones Index and Pound / Dollar exchange rate, to the not so popular Coffee, Dollar / Peso and Interest Rate markets.

Also, because you are trading directly with a spread betting company there are no broker’s fees. And, should you choose to do so, you can close a spread bet early. This can help secure profits or prevent further losses.

Back to the Dow though, how does the market work? Should you decide to spread bet on the index then, looking at a spread trading website like GFT, you may see a spread of 9800 – 9803.

As a result, you could spread bet on the Dow Jones to move above 9803 or below 9800.

For this example, you could choose to spread bet £2 for every point the Dow Jones rises or falls.

If you bought the Dow Jones at 9803 and the Dow Jones index went up then the spread could change to 9847 – 9850. Therefore, you could close your trade for a profit by selling at 9847.

Your Profit (or loss) = (settlement price of the market – opening price of the market) x stake
Your Profit (or loss) = (9847 – 9803) x £2 stake
Your Profit (or loss) = £88 profit

The markets can of course fall, if the market were to drop to, for example, 9761 – 9764 you might decide to close your Dow Jones spread bet to prevent further losses. In that case, you would sell back at 9761.0.

So, with the same £2 per point stake:

Your Profit (or loss) = (settlement price of the market – opening price of the market) x stake
Your Profit (or loss) = (9761 – 9803) x £2 stake
Your Profit (or loss) = -£84 loss

So whilst the above illustrates the positives, it is important to understand the negatives.

Spread bets carry a high level of risk to your capital so you should only speculate with money you can afford to lose. Like the adverts say, before trading, please ensure that spread betting matches your investment objectives. Make sure you familiarise yourself with the risks involved. If necessary seek independent advice.

* Tax law can be changed or may differ depending on your personal circumstances.

About the Author

Based in the heart of London’s financial district, Daniel Jones is a seasoned spread betting professional and commentator for some of the leading financial spread betting websites like Clean Financial.

Nasdaq, Dow Jones, S&P 500 Trading Review 5/24/07

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