European Trading Strategies: Backtest Analysis

With the world getting increasingly connected online and many regions opening up their financial markets to the global investing community, it is now easier to diversify your investment portfolio into other economies. And the European market is an easy choice for portfolio diversification. But what are European trading strategies?

There are different ways to gain exposure to European trading strategies. You can invest in exchange-traded funds (ETFs) or directly trade the stocks via international brokers like Interactive Brokers. If you live in the US, you can also invest through American Depository Receipts, which trades on the OTC markets and can easily be bought via your broker.

In this post, we take a look at European trading strategies and we finish the article with a backtest.

How can you trade European markets?

Smart investors like to diversify their portfolios beyond different industries and sectors in the same jurisdiction. Gaining exposure to international markets helps to reduce risks, and the European market, being home to many of the world’s leading corporations, which have rewarded shareholders with decades of capital appreciation and dividends, presents an attractive choice.

With deregulation in the financial markets and online trading platforms, you can easily gain exposure to the European market. Here are the four common ways you can do that:

  1. Exchange-traded funds (ETFs): One of the easiest ways to invest in the European market is to buy ETFs that track the European markets. Such ETFs invest in stocks whose companies are headquartered — or do a large percentage of their business — in Europe. In fact, there are many ETFs that track the market indexes of various European markets. Investing in such index funds offers the advantages of broad diversification at a lower cost than you might otherwise be able to obtain by attempting to build the positions directly.
  2. Depository Receipts: Another easy way to invest in European stocks is to buy their depository receipts in your country of residence. A depositary receipt (DR) is a negotiable certificate issued by a bank that represents shares in a foreign company that is traded on a domestic stock exchange. The depositary receipt allows you to hold equity in foreign countries and provides an alternative to trading on an international market. The American depositary receipt (ADR), which has been providing companies, investors, and traders with global investment opportunities since the 1920s, is one of the most common types of DRs. If you live in the US, you can easily buy an ADR of a European stock on the OTC market via your broker.
  3. Directly trading the stocks: Purchasing stocks on foreign exchanges is more difficult than purchasing ADRs, but it is possible. Several online brokerages provide special services that allow you to buy and sell securities directly on select international markets. One broker that offers access to most stock exchanges around the world is Interactive Brokers. Another broker that offers access to trading European stocks E*Trade. If you are not a client of ei