So, you are now ready to trade futures, what do we do next! First of course, you need to find a good futures broker, and when checking and comparing commission rates make sure you are comparing like with like. Many futures brokers will quote commission per side, rather than for a round turn. If a commission is quoted per side, this simply means the commission is charged for each side of the contract, so when you open a futures trade this is one commission, and when you close you will pay a second commission. If your futures broker quotes their commission for a round lot, this means they are quoting a price for both opening and closing the contract, a ‘bundled’ price if you like for each futures contract. Check also the exchanges and contracts that the broker offers, and make sure that they have all the CME futures available including the mini dow jones futures contract, which is where I would suggest you start as this is the smallest of the three contracts at $5 per contract.
dow jones trading
Now we are getting down to the nitty gritty of trading dow futures, and just to put this into context, let me give you some facts and figures on the dow jones index, which will either shock, surprise or startle you, but will also remind you that risk management is the key to success. The reason I have included them is to remind you once again of this fact!! So here they are :
- Biggest gain for the dow jones in 1 day : +936.42
- Biggest loss for the dow jones in 1 day : -777.68
- Largest one day swing in the index : 1215.42 ( between the high and the low )
Now whilst these are exceptional price moves, it does indicate how much 1 futures contract could move in a single day. Even if you were trading one mini dow jones futures contract at $5 per contract, in one day you could have made or lost, $4680 on the day with the biggest gain, and $6,075 on the largest swing day, with the other somewhere in between. This is on one contract, and with no stop loss, hedging or risk management in place would require some serious margin in your account. This is how much you could make or lose in one day. In most normal days of trading the dow jones will still move between 200 and 300 points in a typical trading session.
Trading your futures contract is very easy. To trade a long position you buy a contract and to trade short you sell a contract, and equally to close a position you do the opposite. So if you were opening a long futures trade you would first select the contract that you propose to trade, and my suggestion would be that when you start you only trade the near month contract, which will be the one that is closest to expiry. I would also suggest that you do not choose contracts that are due to expire in a few days, as you may then be faced with having to roll the contract forward, so if this is the case, wait for that contract to expire and then begin trading the next near month contract. Having selected your contract month, you would then place a buy order in your online broker account, and to close the trade simply place a sell order, for the same contract and for the same number of contracts, and you will then be ‘net square’, and have no further exposure to the market.
The next issue of course is your trading strategy, and again you must have a clear and well defined trading plan and strategy, which will keep you out of trouble in all trading conditions. When I started trading in ftse futures, I was a scalper, short and simple, and I will teach you how to do the same shortly. My stop loss position was defined at 5 index points below or above the entry position, capping my maximum loss on each trade. My entry point was defined by a technical signal from my chart reading and analysis of the dow jones futures chart, coupled with a simultaneous analysis of the cash chart. Now whether you choose to adopt a scalping strategy, a hedging strategy where your futures contracts are hedged in other associated markets, or you are buying or selling futures contracts to hedge a stock portfolio, you must have a trading plan, which defines this in simple terms, along with detailed and defined risk management which you implement on each and every trade religiously. I cannot stress this point too much – you must have a clear and detailed plan before you start – please! Now the last point I need to explain is margin.
margin trading
As I have outlined several times before, all futures trading is executed using a margin account, and as such the exchange rules demand that all futures positions are covered by two different types of margin, initial margin and maintenance margin, which are very different. The first of these is the ‘performance bond’ that guarantees to the futures exchange that you have sufficient capital to trade in the futures market, and this is called initial margin. For the CME these are as follows at present :
- Dow mini ($5) – initial margin $ 6,500
- DJIA ( $10) – initial margin $ 13,000
- Big Dow ( $25) – initial margin $ 32,500
This is the amount you will need to deposit in your online account in order to trade one dow futures contract. As soon as you open your account, the position will then be subject to maintenance margin. If we take the dow mini for our example, the maintenance margin quoted by the exchange is $5,200, so in this case if the fund value of your account fell to $5,200 then you would immediately receive a margin call for $6,500 – $5,200 or $1,300 to bring your account back into balance and up to the level of the initial margin of $6,500. This amount is also sometimes called variation margin. If you fail to respond to a margin call your positions will be closed out by your broker to bring you account back above the initial margin level once again.
Now finally, let me explain how I trade futures using two live screens, one for the dow jones futures chart, and one for the dow jones index, and use volume spread analysis to identify trading opportunities in the dow jones futures market.
