DowStomper exists to give you insight into how you can profit from the day to day movements in the Dow, the USA's most important index. Here's how you start.

There are a variety of ways to trade the Dow, and therefore take advantage of the DowStomper system. The most common way is to use futures contracts. If you don't know what a futures contract is, here's a good place to start - investopedia . You can choose either the 'full size' contract, or the 'mini' contract. The mini has far smaller margin requirements than the full size contract, and is only one fifth the size, an interesting insight that explains why it tends to be the contract of choice for most traders, as it only moves $5 for each point the Dow moves. You can buy or sell these contracts, allowing you to take advantage of the Dow Index whether it is moving up or down. You go LONG to take advantage of the Dow moving up, or go SHORT to take advantage of a falling Dow. Once you are long, for every point the Dow moves up, you make $5 from each mini contract you hold. If you are short, you make $5 for each point the Dow falls per contract you hold.

Here's the official explanation of the mini dow futures contract:-
http://www.cbot.com/cbot/pub/cont_detail/0,3206,1008+17324,00.html

and here's another one in PDF format:-
http://www.cbot.com/cbot/docs/49707.pdf

This free guide also claims to show you how to trade the mini dow:-
http://www.cbot.com/cbot/docs/42357.pdf

Another popular way to trade the Dow is via ETFs (Exchange Traded Funds). The symbol typically used for this is DIA which means, of course, that most traders refer to them as 'Diamonds'. Diamonds are traded almost like a stock. The other 2 ways most traders play the Dow is by 'contracts for difference' (CFDs) and 'spreadbetting'. More on these later.

There is an old saying 'the trend is your friend'. What this means is that the key to making money trading the Dow is to be on the right side of the trade. In other words, if the Dow is rising, you want to be long, and if it is falling you want to be short. It was the incredible insight into the net of factors powering the Dow moves by the designers of DowStomper that led to the discovery of this indicator, and enables this incredible system to keep you consistently on the right side of the market (and therefore making money!)

How To Trade The Dow

Let's start with the mini contract, which closely tracks the Dow Jones spot price. Each mini Dow contract is worth $5 x Dow Jones Index. For example, if the Dow was at 10000, the value of a contract you would be buying would be 10000 x $5 = $50,000. You would have to stump up nearly $2,000 in margin in order to trade each contract if the Dow was at this level. You broker will keep you informed of contract requirements.

Each mini Dow Contract has an expiry date. This is why you see contracts with names such as March Dow, June Dow, September Dow, and December Dow. According to the specifications of the contract, the expiry date of each mini contract is the 3rd Friday of the contract month. Therefore, if, for example, you bought a September Dow contract, you would have to close your position at the very latest by the 3rd Friday of September. Important point - the closer in contracts almost always have the best 'liquidity'. For this reason, you will only ever trade the closest-in contract. The nearest contract in August, for example, is the September contract.

So how do you physically buy a Dow contract? Imagine it is August, and the Dow is at 12500 and the dowstomper just signaled a 'buy' or Long trade. Call your broker (or go online and check!) for the current price for the Dow September E-Mini (September would be the nearest month), and the quote is "11499 - 12501". The lower price is the 'bid'. You SELL or go Short at the bid. The higher price is the 'ask'. The ask is the price you can BUY the contract for - so to go long, you Buy at the ASK. Depending how you trade, the spread (difference between the bid and ask) will be between 1 and 6 points typically). If you don't get a decent small spread, think about changing your broker.

In the example, the 'buy' price of 12501 is higher than the Dow spot price (i.e. 12500). Futures contracts always 'lead' the real market in one direction or another - this lead gives insight into what the market thinks the Dow is likely to do in the life of the contract. This 'premium' is the difference between the price now, and the price the market expects the Dow to rise or fall to by the time the contract expires (3rd Friday of September).

Let's extend the example. Imagine now that over the next few days, the dowstomper proves correct, and the Dow does indeed rise, say by 200 points. If you want to close the position (i.e. take your profits and run!) you would call your broker again (or go online to your brokerage website) and get a quote for the September Dow. Because futures 'lead' the cash market, and the Dow seems to be strongly rising, your broker quotes you '12750 - 12751'. To close a Long position, you simply sell the contracts you own - so this time you will trade at the 'bid', i.e. the lower price of 12750.

How much money did you make? You bought 1 contract at 12501. You sold that contract at 12750. You just made $5 x 249 points = $1245. You will have dealing costs to deduct from this (these commissions are how the broker makes most of his money - you can get 'deep discount' round-trip costs as low as $6 if you look hard), so let's say $1225 per contract. Obviously, if you had traded 2 contracts, you would be looking at a profit of about $2450 and so on.

Remember that you won't be trading the cash market itself, and the dowstomper is calculated over the cash market, so your profits will differ from those posted on the site, by the amount of the premium for the contract you trade (and other expenses like commissions, slippage etc).

Which futures broker is best? There are dozens of them. Which one you choose is up to you. Usually, you just have to apply online, deposit some money as margin from your bank account (under $2000 per contract you wish to trade in normal circumstances) and bingo - off you go. So that's futures contracts.

How about 'Exchange traded funds'?

The Dow ETFs are known as 'Diamonds'. There's a good beginner's explanation of ETFs that will help you gain insight into the process here - yahoo

Basically, ETFs trade like ordinary stocks. They track the security they are based on, but at a much lower price. The DIA, for example, is about 1/10th the price of the Dow itself. If the Dow rises, so does the ETF. If it falls, so does the ETF. You go Long on an ETF by 'buying' it, just like you would buy Csco or Yhoo. You go Short by selling it. Your broker may have rules about shorting that you should check up on, but apart from that, the procedure is pretty much the same as futures contracts. Your best place to start with an account for trading Dow ETFs is sogo

Spreadbetting and Contracts for difference.

These tow trading methods are similar, so we will start with CFDs. Like a futures contract, CFDs have a 'spread'. This spread is likely to be larger than on the futures contract, but then again, you usually require to put up less margin (i.e. they are more highly leveraged than futures). Basically, if you think the Dow will rise, there is someone else out there who thinks it will fall. This difference of opinion is the basis of the contract.

The broker company facilitating the contract puts you together with the other person, charging by use of the 'spread' (which is why it is larger than on futures). If your insight makes you think the Dow is rising, the broker puts you together with a person who thinks the Dow will fall. He then opens a real position himself, effectively at zero risk, selling it to you and the other person less the spread commission he charges.

Like a futures contract, the mechanics are simple - you buy to go long at the ask, and sell to go short at the bid. As CFDs are more leveraged, they are inherently more dangerous, of course.

You can open an account to trade CFDs here

Spreadbetting is very similar to CFDs except that in some jurisdictions, profits are tax free. Also, the spreads tend to be the widest of any method because of this, and very little margin is required relative to a traditional trading account. Nowadays, spread companies online systems look just like real futures trading screens, with charts and online order placement systems. To find out whether you can take advantage of the tax free status of spreadbetting, click here

So to summarize - to paper trade the Dow using dowstomper, whatever method you use, the principle is the same. The system suggests either Long or short. Go long if it suggests long, go short if it suggests short. Put a 1% fixed stop loss behind your trade (measured from the high if you are going short, or the low if you are going long). That's it!

Disclaimers apply.