Trading the DAX

Trading the DAX
Written by Andy

Perhaps you’re looking for a change from your usual trading pattern, and are prepared to look further afield to see what is available to you. The German DAX, the German stock index comprised of the top 30 firms on the Frankfurt Stock Exchange, is a great market to trade and has good volume. Although the index has large swings, they tend to be predictable which gives good trading opportunities.

It’s important to look at differences between the DAX and other financial instruments you may be used to. One of the best reasons to trade the DAX is that it is open for extended hours, so you can usually fit it into your schedule. But just because DAX is made up of 30 different company shares, don’t assume that it behaves similarly to the Dow Jones Industrial Average, which also has 30 shares. The DJIA is a price weighted index of 30 shares, which treats both high and low priced stocks the same when calculating the average. The DAX is a capitalization weighted index, which considers the size of the firm when deciding on the change in the average.

One thing that this means for you is that you cannot trade the DAX in the same way as you trade the DJIA. For example, you’ll find that the stop loss levels use on the Dow don’t work so well with the DAX. Recently the volatility of the DAX has been running high, which is a positive thing for making large profits. Looking at the other side of the coin, this means that you have to be very careful with your stop loss so that you don’t sustain runaway losses.

As well as an average range that’s about three times the range of the S&P 500, there are other things you should know about this index. Some of the best trading time is when the market has just opened, say the first 30 minutes. If you watch the way the DAX behaves each day, you will learn to make most of your gains from it quickly, and then go on to trade the US markets when they open.

There’s another way that the DAX is different from the US indices, and that is to do with the trader habits. Again from watching the DAX you will see that there’s not a lot of back and forth action as traders try to figure out the overall direction for the market. This is because in Germany they do not have the amount of trading that the US has from mutual funds and hedge funds managers. But the end result of this is that the DAX is easier to trade, as it tends to trend for several hours at a time with only small pullbacks.

One way to trade the DAX index is to use a range trading strategy. For instance, for the most part of 2010 the DAX has tended to retrace when reaching the 6,300 or 6,400 level, so you could look to sell short at these levels.

Of course, the DAX will still respond to technical analysis, and you should always have a plan before starting trading, particularly with something new. But if you bear the points mentioned above in mind, there’s no reason why you shouldn’t have an equally successful time trading the DAX as you do with the financial instruments that you are used to.

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