Trading CFDs on DAX30: A Beginner’s Guide
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, medical, 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. The index value has increased more than 13-fold since then, whilst recently hitting a high of 13,525 pts on 7 November 2017.
How to Track Dax Earnings
To track DAX earnings and get a deeper insight into the market capitalisation of each DAX company, you can use two main websites. The market capitalisation of each DAX company can be found found here, and the price/earnings ratios for each DAX company ('KGV' in German), on this website. 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 takes 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) of the DAX30 is at 22.9, meaning it would take 22.9 years, assuming current company earnings remain constant, to re-pay the initial purchase price of the stocks. This historically suggests 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 recent price rises in equities markets across the globe; 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
- equities and Forex can correlate in a number of different ways.
Economies with a strong manufacturing and exporting sector (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 the short-term trading, whether intra-day or intra-week, the most tradable indices would be the Hang Seng, Nikkei, FTSE, Dax, Dow Jones, Nasdaq, and SP500. This is largely due to good volatility, strong volumes, low spreads, and a wide media coverage on these markets that allow to make informed trading decisions. The DAX30 is surely one of the most popular ones, and traders prefer to use DAX scalping strategies. Have in mind that not all DAX brokers are the same, so you always need to check the conditions first.
Why Trade Index CFDs on DAX30
When we talk about trading and investing, one of the better ways to trade for a potential long-term success is to buy an index fund or an equity. We traders also call indices 'equities' as the underlying asset of an index is equities.
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. First, 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 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 used 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 on a demo account first before you trade it on a live account.
Use 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, namely, liquidity. A liquid market means it has many trades on a daily basis and is composed of many active traders. The Forex market is extremely liquid because hundreds of banks and millions of individuals trade currencies every day.
The spread is then divided by the average daily range of a currency pair. This gives us a percentage that tells more precisely how much the spread costs. The lower the number, the better.
Source: Admiral Markets
Fortunately enough, the DAX30 has very low and competitive spreads on Admiral Markets' platform – an advantage you should use to the full extent. Also, Admiral Markets' DAX30 has a very low margin compared to some other brokers' that have really high margin requirements.
How to Trade CFDs on DAX30
Usually, index CFDs on DAX are traded in a form of 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.
In this article, 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 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: Blue EMA (10) needs to cross Red EMA (25) in the upward direction close to Admiral Pivot Support or Pivot Point
Short entry: Blue EMA (10) needs to cross Red EMA (25) in the downward direction close to Admiral Pivot Resistance or Pivot Point
Effectively, if the 10 comes up through the 25, you are looking to go long, and if the 10 drops down through the 25, you are looking to go short.
Here is an example of a short entry. The blue EMA has crossed the red one close to R1 (resistance). Targets are PP (Pivot Point) and S1 (Support).
Source: DAX30, M30, Admiral Markets, Nov 2017, MT4
Below, there is an example of a long entry. The blue EMA has crossed the red one from below, close to S1 (Support). The price then continued towards the PP (Pivot Point) and next 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: DAX30, M30, Admiral Markets, Oct-Nov 2017, MT4
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.
The good thing is that you can practise trading the DAX on a demo account first before going live.