How to Invest in DAX (DE40) Index: Main Methods
Today, we will get acquainted with a stock index available for trading in many terminals - DAX (DE40) index.
What is DAX index?
The DAX index appeared on July 1st, 1988. It is calculated as the weighted average value of stock price capitalization, while the stock price capitalization, in its turn, is counted based on just flexible stock prices. The index also includes dividend profit from stocks with the expectation that it will be reinvested in securities. To put it simply, the index reflects the general profitability of the capital. This is the main difference between DAX and other indices.
The DAX index is tightly connected to the economy of Germany: if the economic situation in the country is getting better, the index will also grow. Previously, the index included the indicators of 30 companies in Germany, but after September 2021 the composition of the index expanded to 40 companies traded at Frankfurt Stock Exchange: BMW, SAP, BAYER, MERCK, ADIDAS, etc.
The list of companies included in the index is not fixed one and forever - it may change based on the capitalization of companies. If an enterprise is suffering serious losses, it may be excluded from the index; vice versa, if a company is gathering pace, increasing its profits and capitalization, it may be included in the index. The list of companies is corrected once in a quarter. The index is calculated during the working hours of the XETRA exchange from 9 a.m. through 5 p.m. CET.
Now let us figure out how to invest in DAX and what strategies to use.
How to Trade DAX?
For many investors, indices are something outstanding, however, things are much simpler than they seem to be. You will get rid of any doubts if you compare the chart of any index to the charts of currency pairs or the charts of stocks.
The charts of indices and other instruments, be it bars or Japanese candlesticks, will not differ too much, which means that, theoretically, any trading strategies that already exist or will appear soon apply to them. I cannot speak about all strategies in one article, so let us concentrate on those without indicators.
Trading DAX with graphic analysis
As with any other chart, the chart of DAX frequently forms various graphic analysis patterns. It is quite easy to find them provided that the trader is acquainted with them. Trend continuation patterns are most frequent. Meanwhile, keep in mind the timeframe you are looking at. An index, or, in our case, a CFD for DAX (DE40Cash), is not a currency pair traded 5 days a week without breaks - an index stops trading at the close of the trading session.
RoboMarkets offers unique conditions for trading Indices. The spread for the DE40Cash index is from 0.5 pips. More detailed information on the conditions is available at this page.
The algorithm of searching for graphic patterns
The algorithm of searching for graphic patterns consists of the following steps.
What timeframe to use for trading DAX index?
This is an important factor because the profit and Stop Loss size depends on it. On a smaller timeframe, there will be much more trading signals during a trading session than on a larger one; the size of the SL will be more acceptable, and signals will be worked off quicker.
Trade intraday on M5 through M30; H1 is, to my mind, the maximum for trading intraday; H4 and higher will suit for trading on the medium term. Transferring your position to the next trading day, account for possible gaps at the market opening – sometimes they may impose certain inconvenience to the trader.
Choosing chart patterns for trading
I am sure that the best patterns are those that the trader knows well. Trend continuation patterns (Pennant, Flag, Inverted Pennant, or Inverted Flag) and reversal patterns (Head and Shoulders, Inverted Head and Shoulders, Double/Triple Bottom, and Double/Triple Top) work off best.
No doubt that trades counter the trend may bring a profit – however, they entail increased risks. Trading the trend is classical.
Calculate possible risks beforehand, as well as potential profit, and stick to the rules of money management. You must be ready to close the position if the situation violates your plans.
Trading DAX by support and resistance levels and candlestick analysis
Trading the levels is also classical. To get started, draw the key support and resistance levels, where the price has stopped or reversed recently, on the chart: longer timeframes (H4 and longer) are most suitable.
Then switch to the chosen timeframe and wait for a signal. We are waiting for reversal candlestick patterns forming near the levels - they will indicate a possible price reversal. Keep in mind the general trend in the index. If your experience is scarce, avoid trading counter the trend.
In the picture below, we can see that the price reached the resistance level at the start of the trading session and formed a Shooting Star reversal pattern. Then the signal of the reversal candlestick pattern worked off. The potential profit-to-loss ratio amounted to over 3:1.
In the second half of the trading session, the price reached the support level where it formed a Hammer. As we see, here as well the trend reversed on M5, working off the signal.
As long as we are speaking about a certain case of trading an individual instrument, remember that there might be no entry signals at all during a trading session.
Make sure you open trades by a fully formed signal only, abstaining from going ahead of the market. DAX index is quite liquid and volatile, hence the candlestick may change at the last moment, so there will be no entry point left.
Trading DAX index looks difficult at first glance only; in fact, it has almost no difference to trading other instruments in the financial market. All trading strategies apply to it, including Price Action, scalping, and variations of strategies with indicators. You may also trade it with the help of expert advisors, only make sure that you have properly tested the bot on a demo account.