Seasonal Trading Strategy For DAX 40 And German Stocks (Rules, Setup, Backtest, Performance Analysis)
Many investors focus on searching for seasonalities in the US stock market. However, seasonal patterns can also be exploited in international stock markets.
Today we will show you a seasonal trading strategy for the German stock market. It is based on previous performance and has performed better than buy and hold since inception.
In this article, we will look at how the German stock market is composed, develop a seasonal trading strategy, and backtest it.
Related reading:
Composition of the German Stock Market
The DAX 40 is Germany’s main stock market index, consisting of 40 blue-chip German companies trading on the Frankfurt Stock Exchange.
Some of its most significant components are Adidas, Airbus, Allianz, Munich Re, SAP, Deutsche Bank, and BWM, among others. It was founded in July 1988 and currently has a $1 250 billion market capitalization.
Since its inception, the DAX has returned 5.36% per year. We believe DAX futures is a fantastic trading vehicle, and you have three contracts to choose from: the big, the Mini, and the Micro. We have also published several DAX trading strategies.
However, for investors to invest in the German stock market from the US, it is much easier to use the iShares MSCI Germany ETF (ticker code is EWG). This ETF invests in large and mid-size German companies. Its biggest holdings are SAP, Siemens, and Allianz. Also, it charges a 0.50% expense ratio, perhaps a bit expensive.
Monthly Seasonalities in the DAX 40 Index
If we look at the historical monthly returns of EWG, we can see that the best time to be invested is in the year’s final quarter. During the rest of the year, the ETF trades more or less sideways.
Here are the average monthly returns of EWG since 1996:
Based on this information, we can develop a seasonal trading strategy.
Seasonal trading strategy for EWG and DAX 40 – trading rules
The trading strategy is pretty simple:
Trading Rules
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- We buy EWG at the beginning of October
- We sell EWG at the end of December
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In other words, the strategy’s