Trading the DAX40 Index Amid Potential V-Shape Recovery

March 30, 2022 20:47

The DAX40 stock market index has declined more than 23% since the start of the year due to a myriad of factors that include rising inflation, the Russia-Ukraine conflict and wild energy prices.  

However, many technical analysts are seeing the potential of a V-shape recovery pattern developing on the price action of the DAX40 index – similar to the V-shape price pattern after the pandemic.  

While the price action in stock market indices is likely to continue to be extremely volatile there are some interesting technical patterns that could be unfolding in the DAX40 index which are discussed in this article.  

Stock Index CFD: German DAX40 Index CFD
Trade.MT4 / Trade.MT5 Account: DAX
Date of Idea: 31 March 2022 
Time Line: 1 – 2 weeks 
Entry Level: 14,930.00 
Target Level: 15,760.00 
Stop Loss Levels: 14,100.00 
Position Size: Max 2%
Risk: High

The Trade.MT4 and Trade.MT5 account allows you to speculate on the price direction of indices using CFDs. This means you can trade long and short to potentially profit from rising and falling prices. Learn more about CFDs in this How to Trade CFDs article. 

All trading is high risk and you can lose more than you risk on a trade. Never invest more than you can afford to lose as some trades will lose and some trades will win. Start small to understand your own risk tolerance levels or practice on a demo account first to build your knowledge before investing. 

Why Trade the DAX40 Index? 

The DAX40 stock index is an index that is used to represent the performance of the 40 largest companies listed on the Frankfurt Stock Exchange. The index includes companies such as BMW, Volkswagen and Adidas and is often used as a proxy for European sentiment since Germany is the largest economy in the EU.  

So far this year, the DAX40 index has fallen more than 23% due to investors’ fear regarding surging inflation, the Russia-Ukraine conflict and the wild moves seen in energy markets such as oil and gas. However, from the lows of the year – so far - recorded on 7 March, the index has rallied 20% higher and has already clawed back 50% of the recent sell-off.  

This has led to some analysts noting the potential of a V-shape recovery technical analysis chart pattern forming, as seen after the stock market declines from the 2008 financial recession and the 2020 coronavirus pandemic and highlighted in the monthly chart of the DAX40 index below.  

During the 2008 recession, the DAX40 index declined more than 55% before putting in a V-shape recovery price pattern. In the 2020 coronavirus pandemic, the index fell more than 42% before a V-shape price pattern formed. 

Source: Admirals MetaTrader 5, DAX40, Monthly - Data range: from 1 Jun 2005 to 30 Mar 2022, performed on 30 Mar 2022 at 7:00 pm BST. Please note: Past performance is not a reliable indicator of future results.

So far this year, the DAX40 index has fallen more than 23% from the highest price level of the year to the lowest price level of the year. Of course, by the end of the year, this could be even lower if the stock index continues to fall.  

At the beginning of the year, most analysts were more bullish on European stock markets than any other region in the world. This is due to the fact they had been undervalued for quite some time as investors favoured US stock indices.  

While many analysts have cut their price targets for European stock indices – to take into consideration the recent market turmoil – most still see some upside from current levels.  

It’s important to remember that there are still some major risk factors for Germany and the European economy. But, on the other side of the equation, fund managers still need to be invested in the market and will be seeing value in some sectors.  

Therefore, using technical analysis can help traders to understand more about who is in control of the market – buyers or sellers? 

Source: Admirals MetaTrader 5, DAX40, Daily - Data range: from 17 Jun 2021 to 30 Mar 2022, performed on 30 Mar 2022 at 7:00 pm BST. Please note: Past performance is not a reliable indicator of future results.

The chart above shows the price action of the DAX40 index on a daily chart, zoomed in from June 2021 to March 2022. Currently, the price is testing two significant resistance levels. 

This includes the descending trend line from the January and February swing highs and the horizontal resistance line circa. 14,841. The most recent price action shows that the price has stalled at the point where these technical levels intersect.  

For the V-shape recovery to continue, the price will need to break through these significant areas of resistance. If so, then there is potential for price to continue towards record highs. We can therefore use this as a basis for a potential trade idea.  

An Example Trading Idea for the DAX40 Index CFD

Based on the analysis above, an example trading idea for the DAX40 Index CFD could be as follows:  

  • Buy the market on a break of significant daily resistance at 14,930.00.  
  • Place a protective stop loss on a break of the recent daily swing low at 14,100.00. 
  • Place a target of a 1:1 reward to risk ratio at 15,760.00 which is well below the all-time high of circa. 16,300. 
  • Keep your risk small at a maximum of 2% of your total account.   
  • Time Line = 1 – 2 weeks.  
  • If you traded with a position size of 0.1 lots on an account funded in EUR, then:  
    • If your target is reached =  83.00 EUR profit    
    • If your stop loss is reached = -83.00 EUR loss 

It’s wise to remember that the price of the DAX40 index is unlikely to go up in a straight line and it may even go much further down before it rises, especially considering the volatility of the markets at the current time.  

Therefore, be sure to exercise good risk management which is one of the most important aspects of trading successfully. You should always know how much you could potentially lose on a trade and the risks involved.  

You can do this using the Admirals Trading Calculator for the Trade.MT4 account, as shown below: 

Source: Admirals Trading Calculator 

Another factor to consider is the cost of trading CFDs. These include: 

  • Spread. This is the difference between the buy price and the sell price of an instrument.  
    • Admirals’ typical spread on the DAX40 is only 1.0 pip between 8am – 4.30pm GMT.
  • Commission. This is the cost to make a buy and sell transaction.  
    • From the Admirals Trade.MT4 account there are ZERO commissions to pay to buy or sell index CFDs.  
  • Swaps. This is the overnight fee to roll your position over to the next day.  
    • The current swap fee for the DAX40 Index CFD from the Trade.MT4 account is –-0.00672 for long positions and –0.00994 for short positions. 

You can find more details on the Admirals Contract Specification page.  

How to Trade the DAX40 Index CFD in 4 Steps 

You can trade the DAX40 Index CFD and other index CFDs from the Trade.MT4 or Trade.MT5 accounts.    

  1. Open an account with Admirals to access the Trader’s Room.   
  2. Click on Trade on one of your live or demo accounts to open the web platform.   
  3. Search for DAX40 at the bottom of the Market Watch window and drag the symbol onto the chart.   
  4. Use the one-click trading feature, or right-click and open a trading ticket to input your trade size, stop loss and take profit level.   

Source: Admirals Web Trader. Past performance is not a reliable indicator of future results, or future performance. 

Click on the banner below to trade the DAX40 Index today! ▼▼▼ 

Do You See the DAX40 Index Moving Differently?  

Remember that all analytics and trading ideas are based on the personal view and experience of the author.  

If you believe there is a higher chance that the DAX40 index price will move lower, then you can also trade short from a CFD (Contracts for Difference) trading account which Admirals also provide.  

The Trade.MT5 and Trade.MT4 account allows you to speculate on the price direction of a financial instrument using CFDs.  This means you can trade long and short to potentially profit from rising and falling prices. Learn more about CFDs in this How to Trade CFDs article. 

Trade with a Broker Who Puts Your Security First! 

  • Additional client fund security, up to $100,000 for Admiral Markets AS Jordan Ltd clients. 
  • Client funds protection insurance up to €100,000 for Admirals Markets Cyprus Ltd clients. 
  • Negative balance protection to protect against adverse movements in the market causing your account to not go below zero - for clients trading with Admiral Markets Cyprus Ltd.  
  • Volatility Protection. Limit the maximum price slippage and losses on both market and stop orders.  
  • Advanced technical features for your personal risk management (partial stops, etc.) 
  • Trade long and short using CFDs and potentially profit from rising and falling markets.  

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INFORMATION ABOUT ANALYTICAL MATERIALS:   

The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admirals’ investment firms operating under the Admirals trademark (hereinafter “Admirals”) Before making any investment decisions please pay close attention to the following:   

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  • The Analysis is prepared by an independent analyst, Jitan Solanki (analyst), (hereinafter “Author”) based on their personal estimations.    
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Jitanchandra Solanki
Jitanchandra Solanki Financial Markets Author, Admirals London

Jitanchandra is a financial markets author with more than 15 years experience trading currencies, indices and US equities. He is an accredited Market Technician with a BA Hons degree.