Trading CFDs on DAX30: A Beginner’s Guide
Reading time: 9 minutes
This article will provide traders with a detailed breakdown of how to trade CFDs on the DAX30 index, with reasoning for why you should consider trading DAX30 CFDs, a discussion of the benefits of trading index CFDs on DAX30, and a DAX30 trading strategy that you can use to get you started!
What is DAX30?
The DAX30 is a stock market index that tracks the price performance of the 30 largest German companies in terms of order book volume and market capitalisation, trading on the Frankfurt Stock Exchange from its Xetra trading venue. It is the equivalent of the Dow Jones Industrial Average traded by its counterpart, the New York Stock Exchange.
These indices are a small selection of the overall market economy of all the companies listed at a national level. The DAX30 covers a diversified group of companies, ranging from manufacturing, banking, insurance, clothing, medicine, pharmaceuticals, logistics, chemicals, and consumer goods. The base date for the DAX30 is 30 December 1987, where it began at a value of 1,000 pts.
How to Track Dax Earnings
To track DAX earnings and get a deeper insight into the market capitalisation of each DAX company, there are two main websites you should refer to: The market capitalisation of each DAX company can be found on Finanzen, and the price/earnings ratios for each DAX company ('KGV' in German) can also be found on this website as well.
What is the Price/Earnings Ratio?
The price/earnings ratio is basically how many years of earnings it takes to pay back the price. A company with a price/earnings ratio of 14 means that it would take 14 years of earnings to re-pay the price. Remember, earnings equal the amount a company earns in a year. The higher the PE, the more overvalued the stock, and during recessions, PE can drop below 10.
According to CNN Money, the Average Price/Earnings (PE) if the DAX30 is at 22.9, it would take 22.9 years (assuming that current company earnings remain constant) to re-pay the initial purchase price of the stocks. This historically suggests that the market currently shows high valuation, with most Western markets usually trading in a 'Average PE ratio range' (i.e. around 14-16).
The flow of cheap credit and QE programmes are the likely result of the price rises in equities markets across the globe in recent years, but the big question is whether these prices sustain high valuations when Central Banks try to normalise Monetary Policy, and in fact, try to taper their QE programmes by reducing their balance sheets.
Trading Index CFDs on DAX30
Have you ever wondered why we traders prefer the term equities to indices? It's because the underlying asset in the index is the price of a basket of publicly listed company shares – equity. In short, equities are merely a stock or any other security representing an ownership interest in the company (regardless of whether the company is public or private). You need to remember that the Forex market is strongly related to equities, and that equities and Forex can correlate in a number of different ways.
Economies with a strong manufacturing and exporting sector for instance (e.g. Japan and Germany), can experience a currency's strength and/or weakness. Firstly, investment preferences largely relate to the longer-term positional trading, usually held for at least one year, which in most countries results in lower capital gains taxes under a 'sit-and-hold strategy'.
As for short-term trading, whether its intra-day or intra-week, the most tradable indices would be the Hang Seng, the Nikkei, the FTSE, the DAX, the Dow Jones, the Nasdaq, and the SP500. This is largely due to good volatility, strong volumes, low spreads, and wide media coverage on these markets that allow them to make informed trading decisions. The DAX30 is surely one of the most popular ones, and traders tend to prefer to use DAX scalping strategies. Bear in mind that not all DAX brokers are the same, so you always need to check the conditions first.
Why Should You Trade Index CFDs on DAX30?
When we talk about trading and investing, one of the better ways to trade for potential long-term success is to purchase an index fund or an equity. Traders also refer to indices as 'equities', because the underlying asset of an index is equities.
What are Index Funds and Stock Funds?
An index fund is a stock fund that owns all the stocks of a major index (e.g. the US S&P 500, Japan's Nikkei 225, or Germany's DAX30). Trading indices is great for two primary reasons. Firstly, you don't have to worry about choosing which individual stocks you want to buy. In the case of the DAX, rather than deciding between Deutsche Bank and K+S AG, you would simply get the stocks of both, along with the 28 other stocks available in the DAX 30.
Another advantage is that the index funds are slightly low-cost. Any time you opt to buy a stock fund, you'll end up paying fees. The funds that are actively managed tend to have a fund manager that tries to pick and choose the best stocks, usually with the highest fees. On the other side, the so-called 'passively managed funds' – like index funds – don't need fancy highly-paid stock analysts, so it's possible to keep the fees much lower.
Scalping the DAX could be performed in different ways. Keep in mind that there are a lot of DAX scalping strategies and systems. We will mention an effective strategy later in this article that you can try with a demo trading account, but make sure to attempt it there first, before you try it out in the live markets. This strategy uses the MetaTrader 4 (MT4) or MetaTrader 5 Supreme Edition (MT5) plugin, so make sure to download it for one of these platforms first.
The Benefits of Trading Index CFDs on DAX30 – Low Spreads with Admiral Markets' Platform
The trader's account should be in a better position to handle setups with larger drawdowns before margin problems hit the radar. Traders are, therefore, less limited in terms of the number of trades. This can be particularly useful when the market accelerates in its price action, and suddenly offers more opportunities to trade.
The spread fluctuation might also depend on the market factor at play, namely, liquidity. A liquid market means that there are many trades completed on a daily basis, and that the market is composed of many active traders. The Forex market is extremely liquid, because hundreds of banks and millions of individuals trade currencies on it every day. The spread is then divided by the average daily range of a currency pair. This gives us a percentage that indicates more precisely how much the spread costs. The lower the number, the better.
Fortunately enough, the DAX30 has very low and competitive spreads on Admiral Markets' platform – an advantage you should use to the fullest extent. Also, Admiral Markets' DAX30 has a very low margin compared to some other brokers that may have higher margin requirements.
How to Trade CFDs on DAX30
Usually index CFDs on DAX are traded in the form of a DAX scalping strategy. Scalping the DAX30 also depends on market conditions. Sometimes, traders can day-trade it, but due its volatility, it is indeed very suitable for scalpers and short-term traders looking for an active market. Below you will find a DAX30 trading strategy that is a good compromise between scalping and day trading, as it is used on a 30-minute timeframe, and is very suitable for beginners.
Timeframe: 30 min
- 10 EMA set on close (blue), 25 EMA set on close (red)
- Admiral Pivot (part of MT4/MT5 Supreme Edition)
Time to trade: The first 3 hours of the London and/or New York sessions (you might also use the Admiral Day Session if it is easier for you to determine which session you are trading).
Long entry: The blue EMA (10) needs to cross the red EMA (25) in the upward direction close to Admiral Pivot Support or Pivot Point
Short entry: The blue EMA (10) needs to cross the red EMA (25) in the downward direction close to the Admiral Pivot Resistance or the Pivot Point
Effectively, if the 10 comes up through the 25, you are would be aiming to go long, and if the 10 drops down through the 25, you would be aiming to go short. Here is an example of a short entry: The blue EMA has crossed the red EMA close to the R1 (resistance). The Targets are PP (Pivot Point) and S1 (Support), you can view all of this in the graph below:
Source: MetaTrader 4 - DAX30 M30 Chart - Data Range: 10 Nov, 2017 - 20 Nov, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
In the graph below there is an example of a long entry. The blue EMA has crossed the red one from below, close to the S1 (Support). The price then continued towards the PP (Pivot Point) and then to the resistance levels. Sometimes (as we can see in this example), price momentum is so strong that it might even touch R2 and R3 (Resistance).
Source: MetaTrader 4 - DAX30 M30 Chart - Data Range: 20 Oct, 2017 - 2 Nov, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
The DAX30 is a volatile index, but trading it can be very rewarding. Due to its nature and inter-market connections, very often you will see the best DAX30 moves during New York sessions. There is a 'follow-the-leader' issue as the Dow usually tracks the DAX, which, in turn, tracks the FTSE until the American markets open properly after lunch.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.