The Dow Jones Industrial Average (US30) is the oldest US stock market index, and also one of the most popular in the world. Liquid and attractive from a cost perspective, it is always trending among traders – especially those who prefer to engage the markets online.
The US30 instrument is available with almost all retail brokerages that cover indices, which goes to show just how popular and attractive it is. Despite that, there are still some challenges that you should be aware of, when trading US30.
Exposure to cyclical stocks
As its name suggests, this is an “industrial average”, which means that there are many cyclical stocks which are part of it. Caterpillar, 3M, Chevron, Boeing, Walt Disney, and McDonald’s are just several of the 30 names that make up the Dow. This is an important aspect to consider because these stocks perform well during times of economic expansion and rising interest rates.
Despite the fact that all US major indices retraced from the all-time highs, US30 has been in a good position from the beginning of 2022, and has not breached below key support areas. That is because sectors such as energy, financials, and industrials are outperforming, keeping the index in a better shape.
Dow = a price-weighted index
Compared to S&P 500 or Nasdaq, which are cap-weighted indices, US30 is price-weighted. That means the market capitalization of the 30 stocks that are part of it doesn’t influence the index movement. Subsequently, stocks with a higher price influence the Dow the most. United Health, Goldman Sachs, Home Depot, and McDonald’s are the names with the most expensive shares right now.
When these move up or down impulsively, they have a greater influence on the overall index. Traders should keep that in mind, because regardless of whether other stocks that are part of this index are rising or falling, the larger names can keep the index stable (and vice versa).
Risk management with a volatile instrument
Currently standing at around 34,900, US30 is the most expensive and also the most volatile US index today. Since intraday price movements are larger, as a trader, you need to be aware that risk management rules should be adjusted accordingly.
Stop losses need to be wider, so you don’t get bumped out of the market on each counter-trend move. Tied to this adjustment, it’s also important to reduce position sizing, so you can maintain the same exposure without taking exaggerated risks.
The past couple of weeks have been volatile for US30, as higher Treasury yields, inflation, and prospects for monetary tightening remain key concerns for stock markets. There is no longer an established long-term trend in play with minor pullbacks, so timing your trades becomes more difficult.
All in all, US30 remains a suitable trading instrument for both traders who are just beginning to get to know the markets. as well as those with an established track record. However, it’s important to consider all of the features discussed here, because these particularities, which are characteristic to this index, can influence your trading regime significantly.