A Primer On Trading Bitcoin Against Dow Jones
In recent times, markets have been quite volatile. One may begin to wonder why the Dow Jones index visited the therapist. Probably because of all the ups and downs it has been experiencing.
Some may even say that the Dow Jones went on a diet. Perhaps, it might have wanted to lose some points after all! Yes, not all our jokes are the best. But, our crypto CFD platform offers you all kinds of pairs to trade.
We are talking about crypto vs shares, crypto vs indices, crypto vs commodities, and crypto vs forex. Today, we would like to discuss one crypto index pair called the Bitcoin vs Dow Jones pair. Its symbol is BTC/DOW and it is offered with a 100:1 leverage ratio.
The Dow Jones index is one of the oldest stock indices in the world. It consists of 30 large companies in the US and is often considered to be a gauge of the overall strength of the US economy.
The interesting thing about the Dow Jones index is that it is a price-weighted index. It means that the stock with a higher price has more weightage.
Trading Crypto vs An Index
Trading a cryptocurrency vs an index is like trading the USD against another currency like the EUR or the JPY. Think of a ratio chart. The numerator is a cryptocurrency and the denominator is an index.
If the numerator increases at a higher rate than the denominator, then the ratio increases. If the numerator decreases at a higher rate than the denominator, then the ratio goes down. If the numerator stays sideways but the denominator increases, then the ratio also goes down.
As you can tell, trading a ratio or a pair can have many permutations and combinations. So, you can potentially design a lot of strategies for a long or short position.
On Cerus Markets, we offer a range of crypto-index pairs. You can trade BTC/NAS, ETH/DAX, and a long list of other such CFDs. So, you can simultaneously take a position in a cryptocurrency and an index.
In the BTC/DOW CFD, Bitcoin is the base currency and the Dow Jones index is the quote currency. BTC/DOW effectively indicates the number of Dow Jones index units needed to buy one Bitcoin.
So, when someone talks about trading crypto vs index, that person is most likely referring to a pair or a CFD in which you are long one asset and short the other. It is like a ratio.
Understanding The Current Position of Bitcoin and the Dow Jones
Bitcoin had been touted by its proponents to be a hedge against inflation, a safe-haven asset, and something of an alternative to conventional assets.
However, a lot of those theories haven’t quite played out during the recent economic turbulence. The weekly chart for Bitcoin shown below demonstrates it through the price action.
(source: Cerus Markets, Bitcoin weekly chart)
Bitcoin prices fell from the end of 2021 till about early 2023. This time coincided with rising interest rates around the world as well as the war in Ukraine. However, there appears to be some recovery in the price in recent weeks.
The Dow Jones index, on the other hand, appears to have performed a little bit better. Below is the weekly chart of the Dow.
(source: Cerus Markets, Dow Jones index weekly chart)
The Dow index did experience a significant downturn in 2022, but it recovered somewhat by early 2023. Since then, it has fallen a bit during the first three months of 2023.
One possible reason could be the fact that the Dow Jones Industrial Average, as the index is officially known, has blue-chip companies which tend to be somewhat of a safe-haven choice in troubled times. The 30 companies in the Dow Jones index are household names with financial stability.
Strategies To Trade The BTC/DOW CFD
Traders should first try and figure out where Bitcoin and the Dow Jones index are likely to go in the near and medium term. Based on that analysis, multiple strategies could be created.
One could either take discretionary trades based on where prices are in relation to key support and resistance zones. One could also wait for breakouts or breakdowns to occur before taking a discretionary trade.
System and rules-based traders can try using technical indicators to create strategies. For example, traders could use a moving average crossover on the BTC/DOW ratio chart to generate entry/exit signals.
Traders can also combine the moving average crossovers with other indicators like RSI. Positive momentum on the RSI along with a moving average crossover could lead to a long trade while an RSI value below 30 along with a moving average crossover (negative) could lead to a short trade.
One would have to look at the actual price action along with technical indicators to figure out an appropriate trading strategy.
Don’t Lose Your Shirt, Follow Risk Management
CFDs are a leveraged product. While they can multiply your profits, they can also multiply your losses if you are not careful. Following risk management principles is essential while trading any assets, not just CFDs.
Some basic risk management principles are focused on not losing your capital. This means defining your risk-reward ratio before you punch in a trade.
Once you know what you will lose, you can then size your positions to define the exact amount you are willing to lose from a trade.
On the Cerus Markets platform, you can also use features like stop-loss and alerts to implement the risk management setup that you have planned.
The goal is to protect your trading capital and not lose everything because no trade is risk-free.
We hope that you found this blog on how to trade Bitcoin against Dow useful. We covered what it means to trade crypto vs an index, where Bitcoin and Dow Jones currently stand, and some strategies that could be looked at while trading Bitcoin against Dow Jones.
Lastly, we also encourage you to think about risk management principles when trading CFDs. If you feel ready to start trading, then we are offering a 100% welcome bonus offer right now to all our new sign-ups.
Good luck and happy trading!