Trading CFDs on the DAX Index: A Beginner’s Guide

Admirals
25 Min read

This article will provide traders with a detailed breakdown of how to trade CFDs on the DAX 40 index, reasons to trade DAX 40 (formerly DAX 30) CFDs, a discussion of the benefits of trading index CFDs on the DAX index, and a DAX 40 trading strategy that you can use to get you started!

What is the DAX 40 (Formerly DAX30)?

What is the DAX index? If you're wondering what the DAX 40 index is, it is one of the major stock market indexes 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.

What does DAX index stand for? The acronym comes from the German words Deutscher Aktienindex, which means German stock index.

So, what are the 3 major stock indexes? It depends on if we are talking about a global, regional or national scale. Globally, the FTSE All-World Index, S&P Global 100 Index and the Dow Jones Global Titans 50 are three of the major ones. However, the DAX40 is of the three major indexes in the European region.

All national indices, like the DAX40, contain a small selection of the overall market economy of all the companies listed within the respective region. The DAX 40 covers a diversified group of companies traded on the Frankfurt Exchange, a German stock exchange.

These range from manufacturing, banking, insurance, clothing, medicine, pharmaceuticals, logistics, chemicals, and consumer goods. The base date for the DAX 40 is 30 December 1987, where it began at a value of 1,000 pts.

As of the 20 September 2021, the DAX 30 admitted ten new companies and subsequently became the DAX 40

The History of the DAX Index

This German DAX40 (formerly DAX 30) was designed by Frank Mella, an editor for Börsen-Zeitung who was entrusted with the task of developing a German stock index of the most significant companies in Germany.

The result of this work pleased his superiors, and they introduced it to a group of expert bankers. They likewise were impressed with the value of Mella's work and decided to work together to birth the German index, DAX 40.

Historical prices:

  • The DAX 40 stock index was launched on December 30, 1987, with a value of 1,000 points. Since that time, it has been revalued more than 13 times.
  • The highest level in the DAX40 was 13,903 points, on December 29, 2020.
  • The first time the German index closed above 5,000 points was on March 20, 1998, at 5,001.55 points.
  • Its biggest yearly fall was in 2002, down 44% throughout the year.
  • On October 13, 2008, the DAX40 experienced the highest gain in a single day, 11.40%.
  • The first time the German index rose above 12,000 points was on March 16, 2015, closing at 12 167.72 points.

Over the past five years, the German DAX index has been on a bit of a price roller coaster, creating a lot of opportunities for savvy traders:

  • 12/31/2015: +9.56%
  • 12/31/2016: +6.87%
  • 12/31/2017: +12.51%
  • 12/31/2018: -18.26%
  • 12/13/2019: +26.48%

After five years, this means the DAX was up by 34.2%, meaning significant gains for long-term long traders, as well as potential short and long gains throughout the period for shorter-term traders.

Key economic milestones

  • With the birth of the European Monetary Institute in 1994 and the establishment of its headquarters in Frankfurt, the DAX100 was introduced. The purpose of this index was to analyze the performance and evolution of the 100 most liquid entities.
  • A year later, in 1995, the privatization of the state Deutsche Bundespost in Germany took place. This operation resulted in the segregation of the institution into three independent companies: Deutsche Post AG, Deutsche Telekom AG and Postbank AG. Two of these entities are still part of the conglomerate of companies that constitute the German index, DAX40, today.
  • In November 1996, the state-owned Deutsche Telekom carried out the largest OPV in the history of the German index. 713 million shares were issued and raised 13 billion euros. As a result, the demand exceeded the offer five times.
  • In 2000 the euro was introduced. The German mark, Germany's previous currency, was discontinued.
  • 2003 was a bad year for the equity market, particularly for the German DAX 40. It was blamed on the so-called 'new market'. After the explosion of the dotcom bubble, DAX40 prices plummeted.
  • The largest corporate merger in the history of the DAX index took place between Daimler-Benz and Chrysler, which was finalized on May 7, 1998. At that time, it was the largest merger in the automotive industry. Daimler shareholders owned approximately 57% of the new company, while Chrysler shareholders owned the remaining 43%.
  • In October 2008, Volkswagen was the most valuable company in the world, at least for a few hours, when the share price exceeded 1,000 euros. In the middle of the battle of takeover between Porsche and Volkswagen, there occurred a short-term rise due to a strong accumulation of money. In the market, the price swells when short sellers cover their positions in a stock.

The DAX 40 today

Since its launch 30 years ago, the value of the DAX index has multiplied more than ten times. If an investor had bought shares in the index at the highest level in 1988, they would have obtained a yield of 7.5% on an annual average.

The German index also remains one of the most important stock indices worldwide. It serves as the basis for many of the financial products with which we can actively trade, and is the third-largest underlying for the derivatives market.

And if you want to start trading on the DAX40 index today, you can click the banner below and open a FREE Trader's Room account with Admirals.

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What Companies are in the DAX 40 Index?

As the name implies, the DAX 40 index is made up of 30 companies from the German stock market. The following table displays which companies are part of the Index, as of January 2021:

Adidas Allianz Basf Bayer BMW
Beiersdorf AG Continental Covestro I Daimler Deutsche Bank
Deutsche Boerse Deutsche Post Deutsche Telekom E.ON Fresenius SE
Fresenius Medical Care HeidelbergCement Henkel VZO Infineon Linde
Lufthansa Merck MTU Aero Munich RE RWE AG ST

SAP

Siemens AG Volkswagen VZO Vonovia Wirecard AG

The German industrial group ThyssenKrupp, one of the founding members of the German index, stopped trading on the DAX 40 on September 23, 2019, as a result of a sharp fall in the price of its shares. It was replaced by MTU Aero Engines, dedicated to the manufacture of aircraft engines.

The most valued company included in the DAX40 index, by market capitalization, is SAP. The German software company's market capitalization exceeds 150 billion euros (as of December 2019).

SAP was a young company, and not well known when the DAX40 was launched, and has since become its star. After entering the index in 1995, it has seen its price rise to impressive levels, reaching the highest position of the German index.

Following SAP, we find Linde with more than 101 billion euros, and Siemens with more than 100 billion euros (valuation as of December 13, 2019). The total market capitalization of the DAX index on the same date is 1,447,110 million euros.

How to Track Dax Earnings

You can track the DAX German stock index earnings and get a deeper insight into the market capitalisation of each DAX company, from the German stock market. 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 repay 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) of the DAX 40 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 an '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.

Why Should You Trade the DAX 40?

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 equity. Traders also refer to indices as 'equities', because the underlying asset of an index is equities.

DAX 40 Trading: Index Funds vs. Stock Funds

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 DAX 40). 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 DAX40.

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.

Low-spread trading on the DAX 40

One of the most common costs of trading is the 'spread', or the difference between the bid and ask price of an asset. Generally, there is a difference between these prices, and this is paid to your CFD broker as a fee. For a trade to become profitable, it first needs to cross the spread - so in a long trade, the price not only needs to rise above the original bid price, it also needs to climb beyond the original ask price.

This is why so many brokers promote their low spread - because spreads eat into your trading profits, one of the things to look for when choosing a broker is how low their spreads are.

The spread fluctuation might also depend on the market factor at play, namely, liquidity. A liquid market means that there are many trades completed daily 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 DAX 40 has very low and competitive spreads on Admirals' platform – an advantage you should use to the fullest extent. Also, Admirals' DAX 40 has a very low margin compared to some other brokers that may have higher margin requirements.

Trade the DAX 40 with leverage

There are many instruments available which allow traders to take advantage of leverage when trading on the German index. Among them are the DAX40 futures contracts.

The required margins depend on each broker. Many traders believe that when trading futures on the DAX 40, the required margins are too high, so they seek an alternative in the DAX futures contracts (DAX40 Futures).

With Admirals, the estimated cost of the DAX40 CFD, with leverage of 1:20 available, is obtained from the following simple calculation:

Divide the current value of the index by 20 points and you will get the necessary margin in euros.

If we continue with our previous example. To open a DAX position of 30 to 9000 points, the margin required for 1 contract becomes 450 euros (9,000/20 = 450).

With CFDs, even small trades can be very interesting. The number of lots you negotiate is your decision, as well as the size of the lot and the trading strategy.

DAX 40 Technical Analysis

Now that you have an understanding of what the DAX 40 (formerly DAX30) is and some of the reasons people choose to trade it, we can take a look at some information that can help us with this trading.

Technical analysis studies price patterns in different assets, with the understanding that history repeats itself. Therefore, if we see a past pattern being repeated, technical traders would assume that the asset's price would move in a similar way to the way it did historically. Let's look at the monthly, weekly and daily charts to learn more about the DAX 40.

DAX 40 technical analysis: Monthly chart

The DAX 40 monthly chart shows the following evolution:

Source: Admirals MetaTrader 5 Supreme Edition. CFD DAX 40. Monthly chart Period: February 2009 - December 2019. Done on December 16, 2019. Keep in mind that past performance is not a reliable indicator of future results.

The key levels are as follows:

  • Annual maximum (2019): 13 455
  • Historical maximum: 13 600
  • Stands: 12 404/10 277

From the beginning of 2017 until the end of 2018 we can observe the formation of a technical figure known as Shoulder - Head - Shoulder. When it was fulfilled in October 2018, the price fell to the support area in 10 277.

From there it has gone back very steeply until reaching the current price at 13 455. As can be seen from the graph, the trend of the DAX40 is clearly bullish.

These three factors confirm the long-term uptrend.

DAX 40 technical analysis: Weekly chart

Source: Admirals MetaTrader 5 Supreme Edition. CFD DAX 40. Weekly chart Period: September 2014, to December 2019. Done on December 16, 2019. Keep in mind that past performance is not a reliable indicator of future results.

  • The weekly price of CFD DAX40 shows the formation of a triangle of indecision between the maximum of April 2015 of 12 404 and the minimum of February 2016 at 8695 points.
  • The DAX 40 CFD broke this figure at the end of July 2016 to get caught by the resistance of 10,700 points until December 2016. The last weeks of that year allowed the DAX stock index to break that threshold and begin a new escalation until it exceeded 11 300 points in 2017.
  • As we can see in the graph, the closest resistance is currently in the area of 13 300 points and, after maintaining a lateral range during November, its next resistance approaches historical highs.

DAX 40 technical analysis: Daily chart

Source: Admirals MetaTrader 5 Supreme Edition. CFD DAX 40 Daily chart. Period: July 3, 2018, to December 13, 2019. Done on December 16, 2019. Please note that past performance is not a reliable indicator of future results.

If we summarize the evolution of the DAX40 CFD during 2018 and throughout 2019, we see two clear trends:

  • A daily downward trend from April 2018 to December 2018.
  • An upward trend since the beginning of 2019 that has become more pronounced since October and is continuing.

If you want to put your technical analysis skills to the test, you can click the banner below and begin simulating your trades on a FREE demo account with Admirals today!

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How to Trade the DAX 40

Medium and long term - Swing trading CFD DAX40

If you have a full-time job, swing trading is the best alternative. All you need to do is analyze the charts a few minutes at the beginning of the week and keep up to date with the news to better manage your risk. This approach has the advantage of saving time and money. In the same way, trading activity becomes more comfortable.

Learn more about Euro indices on an intra day basis and what to be aware of before trading in the below free webinar hosted by expert trader Paul Wallace.

Short term - Scalping CFD DAX40

If you have more time to devote to trading, intraday trading or scalping may be your option. With this trading strategy, you can open your position at any time of the day and close it before the end of the session. The time spans are usually less than one hour, usually around five minutes.

These approaches obviously require taking the daily economic calendar into account, and paying attention to hourly trading charts. For example, the times of day with less activity, such as around noon, should be avoided for a lack of volatile price activity.

The main difference between these trading strategies are:

1. The amount of time you can spend trading the CFD DAX40

2. The amount of time you want to keep your trades open

Scalping the DAX could be done in different ways. Keep in mind that there are a lot of DAX scalping strategies and systems. We will mention an effective strategy that you should try in a demo account before using it in a real account.

The strategy uses the MetaTrader Supreme Edition 4 or 5 plugin, so be sure to download it for free first.

Time frame:

  • 30 min

Indicators:

  • EMA of 10 (blue), EMA of 25 (red)
  • Admiral Pivot (part of MT4 / MT5 Supreme Edition)

Time to trade:

  • The first 3 hours of sessions in London and/or New York.

Long position:

  • The blue EMA (10) has to cross the red EMA (25) upward near the Admiral Support Pivot Support or Pivot Point

Short position:

  • The blue EMA (10) has to cross the red EMA (25) in descending direction near the Admiral Support Pivot Support or Pivot Point

Indeed, if that of 10 crosses the one of 25, you will seek to go long, and if that of 10 falls through that of 25, you will seek to go short.

Example of a short entry:

The blue EMA has crossed the red one near R1 (resistance). The objectives are PP (Pivot Point) and S1 (Support).

Keep in mind that past performance is not a reliable indicator of future results

Example of a long entry:

The blue EMA has crossed the red one from below, near S1 (Support). The price has continued towards the PP (Pivot Point) and the following resistance levels. Sometimes (as we can see in this example), the price momentum is so strong that it could even touch R2 and R3 (Resistance).

Keep in mind that past performance is not a reliable indicator of future results

A Balanced Strategy: Combining Scalping and Day Trading the DAX 40

Usually, index CFDs on DAX are traded in the form of a DAX 40 scalping strategy. Scalping the DAX 40 also depends on market conditions. Sometimes, traders can day-trade it, but due to its volatility, it is indeed very suitable for scalpers and short-term traders looking for an active market.

Below you will find a DAX 40 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

Indicators:

  • 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 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:

Depicted: MetaTrader 4 - DAX 40 M30 Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication 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).

Depicted: MetaTrader 4 - DAX 40 M30 Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Advantages of Using MetaTrader to Trade the DAX40

As we have already mentioned in this article, the DAX 40 (formerly DAX 30) CFD market has fixed schedules.

  • When does the DAX 40 open? 8am
  • What time does the DAX 40 close? 10pm

During this time, you can trade the DAX 40 CFD in real-time, using the MetaTrader platform.

You can benefit from the market opening movements, and the strategies developed around the opening gaps and market intervals.

You can also benefit from narrow margins, so that your trades are as quick, and as profitable, as possible. Because it is a financial instrument closely linked to the economy and companies, so you can continually be informed of price action in the DAX index, and plan your trades accordingly.

Example of opening a position (how to buy DAX index):

The overall stock market opens at 9 am. In this example, we can see that the first hour of DAX trading that corresponds to the pre-opening of the German market has formed a range in the 5-minute chart, established between the upper limit of 13 074.06 and the lower limit of 13 043.26 points. A study of the 30-minute chart shows a downward trend.

A quite plausible scenario is to try to sell the German index at an interesting level or break a key level.

To show an example, this chart represents a session of the DAX 40 CFD:

Keep in mind that past performance is not a reliable indicator of future results

As you can see, it is better to wait for the opening of the stock exchange at 9 am (CET), to observe the real breaks downward of the lower end of the range, where real trading opportunities arrive.

Here the possibilities to trade are many, but suppose for this example that we decided to buy the level break of 13 043.26 points, with a loss limit on the other side of the range of 13 074.03, approximately 30 points higher with a profit objective of 12 982, twice the size of the range.

The following depends on the risk you want to take, the minimum possible size in the DAX 40 Admirals CFD contract is worth € 0.10 per point.

Here, the required size of Stop Loss is 30 points. Your goal is 12 982 to get 60 profit points.

  • 0.10 * 30 = € 3 risk, for a benefit of 0.10 * 60 = € 6
  • 1 * 30 = € 30 risk, for a benefit of 1 * 60 = € 60
  • 10 * 30 = € 300 risk, for a benefit of 10 * 60 = € 600

Here the differential intervenes in the result of its trade setup, with a spread of 0.8 like that offered by Admirals, your positions will have a value of:

  • 0.10 * 0.8 = € 0.08 that is subtracted from your € 6 benefit, that is, € 5.92
  • 1 * 0.8 = € 0.8 subtracted from your benefit of € 60, that is, € 59.2
  • 10 * 0.8 = € 8 subtracted from your benefit of € 600, that is, € 592

As you can see, your net earnings do not vary significantly after trading with Admirals. Of course, you can decide to risk 5 euros or another amount depending on your profile, capital and risk appetite.

This example is just one of the many ways to trade with the German DAX 40 index.

Trading the DAX 40: Conclusion

The DAX 40 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 DAX 40 moves during New York sessions. There is a 'follow-the-leader' issue as the Dow usually tracks the DAX 40, which, in turn, tracks the FTSE until the American markets open properly after lunch.

If you're excited about the prospect of trading CFDs on the DAX 40 index, it's a good idea to practice with a RISK-FREE demo trading account.

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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:
  1. This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admirals shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
  3. With view to protecting the interests of our clients and the objectivity of the Analysis, Admirals has established relevant internal procedures for prevention and management of conflicts of interest.
  4. The Analysis is prepared by an independent analyst, NAME +(Position), (hereinafter “Author”) based on their personal estimations.
  5. Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admirals does not guarantee the accuracy or completeness of any information contained within the Analysis.
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  7. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.
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