How to Trade Dax 40: Trading Strategies and Tips
Dax Trading: The Basics
- Dax 40 is one of the world’s most widely followed and traded indexes.
- Dax news and analysis can inform DAX tradingstrategy, and using common technical patterns.
- When trading Dax traders should use a stop loss and little to no leverage.
Why trade the Dax 40?
The Dax 40 is one of the world’s most actively traded indices and provides traders with a high degree of liquidity, tight trading spreads and long trading hours. The FSE trading hours for the DAX are 09:00 GMT to 17:45 GMT and most providers will also give pre and post-market indications. This is to help traders gauge where markets are expected to open and where they are quoted after the official market has closed.
Dax trends can be easy to spot making it a favourite market to trade. Additionally, Dax traders find the technical patterns to be clean on a multitude of time frames. Due to these factors, traders from around the world follow the Dax and use it to gain exposure or hedge their exposure to equities.
Traders should look to trade Dax 40 when the market is at its most liquid. Trading in low-liquidity conditions leaves traders at risk of low-volume ‘spikes’ or ‘blips’ that can break outside of normal trading patterns.
For example, the chart below shows how the intraday Dax volumes increase near the open and the close of the cash market. This indicates when the liquidity is generally higher for trading Dax 40.
Data source: Bloomberg from August 13-18, 2018, DAX futures
What moves the Dax 40?
When trading the Dax, a number of variables come into play and traders must be aware of their potential impact and the effect they will have on the value of the index. These variables include top-level macro themes, global fundamentals and markets and micro-themes including company and industry moves and valuations.
- Global and regional trade wars bring into question what effect will tariffs have on various companies and sectors in the Dax?
- Currency wars will impact the bottom line of exporters, weighing on their share price and market valuation.
- A weak/strong Euro exchange rate will impact exporters and importers differently.
- Brexit, whether a ‘soft’ or ‘hard’ Brexit will impact companies listed in the Dax in different ways.
- Knock-on effects – Global markets are intertwined and the ripple effect of a sector crisis in one country will impact sentiment on the same industry in different countries around the globe.
- Company weightings in the index – a 5% price movement in one company within the Dax can have a completely different impact on the index than a 5% move from another company with a different index weighting.
How to Trade Dax 40 Using Technical Analysis
The Dax 40 has been traded for over 30 years giving technical analysts a comprehensive set of historical trading data and resources to build graphs and technical set-ups. Technical analysis helps visualise patterns, trends and price points in a constantly moving environment.
Monthly Dax 40 Price Chart with a Selection of Technical Indicators
(Pro-Real Time Chart)
In the graph above we have used a selection of technical indicators to help us define trends, highlight shifting sentiment, identify significant highs and lows and potential retracement patterns. Technical analysis helps traders make more informed decisions by identifying potential trade set-ups and exits.
There are a variety of different technical indicators available and traders should decide which ones that they want to use and why. The best way to decide which indicators to use is by rigorously testing various scenarios and indicators and finding out which ones you are comfortable and confident using.
We have a wide range of technical resources and analytical guides for traders of all levels and run free trading webinars covering all aspects of the financial markets - including technical trading, fundamental market analysis and sentiment.
Dax Trading Strategy: Top Tips
Trading the Dax 40 is very similar to buying and selling a wide range of financial assets and the reasons for entering and exiting a trade, discipline and psychology remain constant and key.
A trader should make sure that they fully understand the product and what trading medium they want to use; for example, futures or spread trades. A trader must know his/her reason for entering the trade and must not be swayed by market ‘noise’ or recommendations and be disciplined enough not to let the market lead him/her into a trade.
Here’s our top Dax trading strategies and tips:
- Decide your entry level, exit point and stop loss. If you are using technical analysis to decide levels to trade Dax 40, make sure you have rigorously tested your analysis before trading and that you are comfortable entering the position.
- Entering trades before major data releases is risky and should be avoided. It is better to let the ‘dust settle’ after a release and miss a small part of the move than to gamble that the data release will be good or bad for the market.
- Do not place a trade - either a long or a short - without placing a firm stop loss.
- Before entering a trade, decide your risk-reward; for example, risk one unit to make three units. See our traits of successful traders research for more detail as to why.
- Do not place a large percentage of your capital on any one trade, however strongly you feel about it. At DailyFX we suggest limiting your exposure to less than 5% risk on all open trades.
- Select your timeframe for the trade, such as one hour, one day, one week or several weeks.
- Make sure that you are in a ‘good place’ before trading the Dax 40. Do not trade when you are tired, distracted, emotional or bored.
- Don’t be greedy when trading. Experienced traders will tell you that buying at the bottom of the market and selling at the top is nigh on impossible and increases risk.
- Record all your trades comprehensively, making sure that you note why you entered the trade, how you felt, how the trade played out and the final result. The more you record your trades and their outcomes, the better prepared you will be for your next trade.
- Trading is like a full-time job and should be treated like one. Constantly study and update your trading technique.
- There are a variety of financial products available to trade. Traders should use a practice account test run various products to find where their strengths and weaknesses lie.
- And remember to enjoy it!
RESOURCES TO HELP YOU TRADE THE MARKETS
Whether you are a new or an experienced trader, at DailyFX we have many resources to help you: analytical and educational webinars hosted several times per day as well as trading guides to help you improve your trading performance.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.