The Dow Jones Industrial Average is one of the oldest stock indexes in the world. It tracks 30 of the largest U.S. stocks traded on the Nasdaq and the New York Stock Exchange, and for this reason is also sometimes known as the US30. These stocks are picked from a variety of sectors, including industrial material, financials, telecommunications, energy, information technology, and health care.
Like its rival the S&P 500, the Dow is a representative of the U.S. stock market. It’s often called the ‘blue-chip index’ due to the types of companies it contains.
Factors That Influence the Dow’s Movement
At the time of writing, the Dow has been in an uptrend for more than 9 years. This long-term bull market has been underpinned by the good performance of companies in the Dow, and the stable economic growth of the U.S.
So, what are the factors that can affect the Dow?
Well, we can’t continue this article without mentioning the important role of the Federal Reserve – the U.S. central bank. It’s responsible for maintaining the balance of the U.S. economy and keeping it growing. Interest rate decisions and announcements from the Federal Reserve, therefore, have a big impact on the Dow’s movement.
In addition, the Dow is also affected by U.S. economic data releases as they provide the indication of the current and future state of the U.S. economy. High-impact economic reports such as Employment Change, Consumer Price Index (CPI), Retail Sales, or Non-farm Payrolls can affect traders’ sentiment and make the Dow fluctuate.
Tips For Trading the Dow
- Keep an Eye on Economic Data Releases
As mentioned above, U.S. economic data and interest rate decisions from the Federal Reserve can influence the Dow’s performance. Therefore, remember to track them. Use a financial calendar to stay up to date with forthcoming news. Try not to miss any important events, because one second of distraction might cause you to miss a trading opportunity.
- Use a 200-Period Moving Average to Visualize Trends
Stock indices tend to move in one direction because they are based on price moves of the constituent stocks. Therefore, it’s a good idea to track their trends with a long-term moving average.
Professional DJIA traders often apply a 200-day simple moving average (SMA 200) to the Dow’s daily chart to measure its trends. When prices are above this line, they look for bullish trading opportunities on shorter-term setups. Conversely, when prices turn below the SMA 200, they prepare for bearish trading setups.
- Don’t Trade When You Are Emotional
Emotions may be good in love but are useless in trading. They negatively influence traders’ rational thinking and reduce their ability in making accurate decisions.
Sometimes, the Dow can strongly seesaw and you might react to this by changing your trades. But don’t let its fluctuations affect your long-term strategy. Keep in mind that indices tend to move in one direction, so the major trend should return soon.
Also, don’t trade when you are not fully alert or not feeling less than 100% physically or mentally. That’s not beneficial for your finances.
The Bottom Line
You have just discovered some useful tips to trade the Dow. Everything is up to you now. If you’d like to do some trading experiments, open a demo account. Or, if you are confident enough to get instantly into trading for real, go ahead and open a real trading account.
One important note: if you just start out, do it small. That will help you gain real experience trading the US30 at a low cost.