Candlestick Trading Blog
September 4, 2009
Dow Futures
| Dow futures contracts trade on an exchange and they have built in leverage which allows traders to make a lot more money on fluctuating prices in the market. Futures contracts are legally binding agreements between two parties where each party agrees to exchange an asset based on a relationship to a pre-set price on an underlying index. These futures contracts serve as a counter-party of every position so you don’t have to worry about the investor who holds the other side of your position. This is because all of the futures contracts are cleared through the options exchange. Unlike options contracts, which give the holder the right but not the obligation to exercise the terms of the contract, in a futures contract, both the buyer and the seller must perform their part of the contract. The Dow futures begin to trade on the Chicago Board of Trader at 7:20 a.m. central standard time. This is one hour and ten minutes before the stock market opens and it gives people an idea of the sentiment of the markets since it allows trading to take place before the actual stock market opens. What this tells investors is that if a company reports major earnings in the Dow Futures and the futures go very high, then chances are that the market itself will rise as well. This of course also means that if something occurs before the stock market opens that causes the futures to drop on the Dow, then chances are the stock prices will fall once the stock market opens. As stated above Dow Futures have built-in leverage that allows traders to make a lot more money on price fluctuations in the market than they could by simply buying stock directly. These futures work on a 10 to 1 leverage which means that if you are trading at 8,000, a single futures contract would have a market value of $80,000. That means for every one dollar, the Dow Jones Industrial Average fluctuates and will either increase or decrease ten dollars. What this means is that the stock trader who thought the market would rally big would acquire these futures and make a major profit as a result of this leverage. When learning about the stock market, trading futures contracts, and trading options, there is so much to learn that it can be overwhelming. Just take it one step at a time, focusing first on the stock market basics, and then go from there. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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