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How to Profit from CFD Trading the US30

   

forex-tips-and-strategies-2018

Index trading is a popular, easy way to invest in a group of businesses, or a representative sample of a country’s largest companies, without being forced to invest in individual companies.

For forex traders, index trading is an attractive alternative to directly investing in a specific country’s stock market. Typically, indices are designed to offer a reflection of a given country’s economic strength. But these indices can also serve as a high-performing collection of select holdings from a single market, offering a more concentrated investment opportunity in a foreign country’s economy.

Contract-for-difference (CFD) trading is popular for index investments. Of the various indices available around the world, the US30 is one of the best-known options available to traders, offering an easy way to get exposure to 30 of the United States’ largest companies.

Why Trade the US30?

The US30, also referred to as the Dow Jones Industrial Average or simply the Dow, is the oldest stock index in the world. But the reasons for opening a position in this index have nothing to do with its long history. 

The US30 features 30 high-value, blue-chip stocks representing some of the largest companies and brands in the world, including Nike, Apple, Coca-Cola, Johnson & Johnson, and more. For foreign investors, it’s a great way to invest in the U.S. stock market without buying individual stocks, especially if your goal is to diversify your holdings and lean on large-cap organizations with strong growth prospects.

The US30 is also available to traders who don’t have a U.S. brokerage account, making it a more practical and convenient vehicle for U.S. investments.

Price Drivers and Indicators for the US30

Although the US30 is often referred to in the media as an indicator for the U.S. economy at large, historical data doesn’t back up the belief that the fund has predictive powers. However, it does span all industries, other than utilities, which makes it a broad representation of the leading companies across the United States.

As a result, economic triggers for USD—such as the monthly jobs report, new deals on trade and tariffs, and other economic and political factors—can directly affect the companies listed in the US30, which affects the price of the fund as a whole. Traders should pay attention to political news, such as tariff proposals and trade agreements that are likely to affect any of the companies in the US30—especially the larger companies.

Because the fund is so small, a single company can have a significant impact on the price movement of the entire fund. Traders should also understand that the US30 is price-weighted, which means that higher-priced stocks possess an outsize influence on the rest of the index. 

Companies with the greatest influence on this index include 3M, Boeing, Chevron, Goldman Sachs, Home Depot, Apple, and Visa. By tracking quarterly reports and other news from these businesses, traders can keep tabs on the potential price movements of the US30. In general, experts also recommend watching the 200-day moving average as a reliable indicator of whether to take a bullish or bearish view of the index.

Traders should also follow global economic news, given the multinational reach of all of the companies comprising the US30. Because these companies are so large and expansive, global economic conditions can often affect the value of these companies, in much the same way that global economic surges and recessions impact the overall U.S. economy.

Reports from the International Monetary Fund, for example, can provide useful insights into global economic factors that may affect one or more of the US30 companies. Forecasts and projections coming from these global economic sources can provide an early indication of how the US30 might be aff.

Economic Events to Watch

Given its use as an economic barometer in the United States and around the world, it’s important to understand which economic events are most influential on the rise and fall of the US.

In addition to tariffs and jobs reports, traders should keep an eye on the following:

  • Inflation of the U.S. dollar: High inflation could lead to a decrease in the value of the US30. 
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  • Treasury yields: High yields indicate economic strength and can trigger an influx of investments into the US30. By contrast, low treasury yields can spark panic among traders and push them to abandon U.S. markets and opt for safe havens such as Europe to avoid potential economic fallout.
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  • Industry disruption that affects US30 companies: In some cases, industry upheaval or increased competition can produce strong U.S. economic indicators that adversely affect US30 holdings nonetheless. This is more common with larger businesses in the US30. Keep an eye on industry disruption created by newcomer brands, and how those fast-rising brands are creating instability at the top of the economic food chain.

Other Risks to Consider When Trading the US30

Like any index or market, the US30 is susceptible to wild swings that can create chaos almost out of nowhere. Although the US30 is viewed as more stable than other indices around the world, recent economic havoc created by the COVID-19 pandemic underscores just how volatile even a major index can become.

As the three-month chart below demonstrates, the sweep of the virus around the world—and into the United States—created an unprecedented market shake-up that triggered a swift decline in value for the index. In less than two weeks’ time, the US30 lost more than 35 percent of its value due to a global disaster that ground economic activities to a halt:

Screen Shot 2020-04-20 at 8.14.55 AM

Even if you were predicting a global pandemic as a result of this virus, you probably didn’t anticipate the degree to which these current events would quickly and powerfully bring the markets crashing down. Unfortunately, that’s one of the inherent risks of trading any type of investment. Even though situations like the coronavirus outbreak are rare, the scale of volatility brought by these events can decimate your trading accounts and inflict losses that could take years to build back from.

What can traders do to protect themselves in this scenario? The first thing is to never panic: If you’re heavily invested in the US30, a market crash isn’t the time to pull out your funds. Instead, take the long view. Although the current crash is on a historic scale, the general trend shown on the US30’s five-year chart suggests that time will address these short-term losses:


Screen Shot 2020-04-20 at 8.15.05 AM

In the moment, it’s easy to convince yourself that the sky is falling. But with time and distance from this event, you’re more likely to see this sharp decline as a blip on the radar, rather than a foreshadowing of more losses to come.

This is assuming, of course, that you stick to your principles and trading strategy—and don’t make impulsive decisions based on emotion. 

How to Take Advantage of Wild Market Swings

Economic downturns don’t happen in a straight line. Even if the worst of the US30 is yet to come, that doesn’t mean traders should sit on the sideline until the worst appears to be over. Keep in mind that the worst of the US30’s decline won’t even be evident until we’re on the other side of that downturn. By then, you’ll have already missed out on opportunities to buy low and capitalize on market volatility to turn a profit during tough times.

What’s the best approach? Given the relative newness of this global economic crisis, there’s not much consensus on how to approach trading during this period of turmoil. But some time-honored strategies for leveraging volatility can be effective. Meanwhile, traders should also lean on indicators coming from global news sources to predict market swings and make trades that capitalize on that forecasted activity.

Here are some tips for taking advantage of US30 trends during particularly volatile periods:

1. Pay close attention to global economic news—especially jobs reports and other indicators of economic health. 

Market volatility on this scale is leading to a lot of government intervention, from both the Federal Reserve and congressional stimulus plans, and more frequent updates from the White House.

Pay attention to all of these reports to quickly take the temperature of the U.S. economy and predict where it might be headed. Even local and regional news can have an impact: For example, stock markets recently rose after reports indicated that infection rates for COVID-19 were peaking in certain major metropolitan areas. As one of the major large-cap indices in the U.S., the US30 serves as a good proxy for the overall health of the American economy. As financial news goes, so, too, will the US30’s value.

2. Use traditional chart patterns and technical indicators to spot short-term trading opportunities that capitalize on US30 volatility. 

On a small scale, these patterns still have value for traders. Like other indices, the US30 continues to have ebbs and flows within an overall decline. The daily chart for April 6 illustrates this movement well:

Screen Shot 2020-04-20 at 8.17.13 AM

Given the uncertainty of how this global pandemic will progress, though, it’s probably smart to avoid using these indicators and patterns to project long-term trends.

3. During the COVID-19 pandemic, monitor Asian and European market activities as a template for how U.S. indices might respond. 

Because the presence of COVID-19—and our government’s response to the pandemic—escalated in the United States later than in Asia and Europe, their markets offer a potential preview for how our own markets might behave and rebound in the future.

If you notice that European markets start to recover after their peak infection period is over, it’s reasonable to guess that the U.S. market might see a similar recovery just a week or two later.

By trusting the judgment and intuition you’ve developed over time, and supplementing that expertise with the best available economic information, you’ll put yourself in the best position possible to generate profits during a challenging time for trade

Comparing US30 to Other Indices

An obvious benefit to trading the US30 is that it allows foreign investors easier options to invest in the U.S. stock market. Forex traders use a similar strategy when trading other indices. The HK50, for example, is a popular option for traders looking to open a position within the Chinese and Asian markets. Although it was traditionally conceived to represent the leading brands in American industry, the US30 has evolved over time to keep up with the changing landscape of the American economy and now features industrial brands only in a limited capacity.

Compared to other indices around the world, the US30 is one of the most reliable places to put your money. Similar to the Nasdaq-100, SPX500, and GER30, it’s viewed as a relatively safe option for CFD trading.

Because the US30 has only 30 companies, a drawback compared to other indices is that it doesn’t offer the market representation that other funds can offer. However, it still offers value for traders looking to capitalize on investments through some of America’s largest-cap businesses.

Costs to Consider with CFD Trading

As you approach a CFD trade to open a position in the US30, you’ll want to understand all of the associated costs, as well as the breakeven point you’ll need to hit before you can make a profit off your position.

CFD trades can bring broker commission fees, overnight swap charges, and other fees that vary from broker to broker. These should be calculated into your price analysis when you’re determining whether your expected US30 price movement is enough to cover your costs and turn a worthwhile profit.

Make sure you fully understand the schedule of fees provided by your broker before you engage in CFD or other types of forex trading.

Conclusion

Given the high value of a single US30 contract, using CFD trades to open positions in this index is a potentially lucrative strategy for traders who are eager to diversify their holdings and increase their portfolio’s U.S.-based investments.

Even though the US30 receives an outsize share of media attention as a tool for economic forecasting, it remains an excellent option for traders who want to open a diverse, large-cap position in the U.S. stock market.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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