DAX Trading Strategy – Backtest - Quantified Trading Strategies

Why trade the DAX index and a DAX trading strategy? The DAX index is the main equity index in Germany. It’s one of the most popular trading vehicles in the whole world and has a tremendous daily volume. Because of its popularity, new Mini and Micro-futures contracts have been offered to make it more accessible for smaller retail traders and investors.

Every trader should trade a DAX Trading Strategy of the Greman DAX 40 index because it highly likely offers diversification to your existing strategies. You get diversification from the different trading hours to the US markets, but also because DAX moves slightly differently than the US ones. For example, momentum and gap trading strategies work much better on DAX than on the S&P 500.

Table of contents:

What is the DAX 40 (previous DAX 30)?

The full name of the DAX is Deutscher Aktienindex. It consists of the 40 biggest or most liquid blue-chip stocks listed on the Deutsche Börse Xetra. Up until the 20th of September 2021, the index consisted of 30 companies.

The most known companies that currently are in DAX 40 are Adidas, BMW, BASF, Continental, Daimler, Deutsche Telekom, Henkel, Munich Re, Puma, SAP, Siemens, and Volkswagen. These are all multinational brands and some have a history dating back centuries, the reinsurer Munich Re serves as an example.

DAX 40 is a relatively new index and was created as late as the beginning of 1988 when it started trading at 1 000 points (as of writing it’s at 15 500).

How do you trade DAX 40?

You can, of course, trade or invest in the components of the index, but that is not very convenient. The main reason behind derivatives trading is to offer a convenient and easy trading vehicle that lets you hedge or diversify into a basket of stocks.

There are mainly three ways to trade the DAX:

DAX futures

Dax futures is the easiest way to trade DAX 40, and this is what most traders and funds do. It’s a completely standardized contract and the daily turnover is very high at between 50k to 100k contracts per day. It’s one of the most liquid futures contracts in the world.

A futures contract is a contract between two parties about the direction of the DAX. The broker is obliged to make sure the two parties fulfill their part of the obligations. Because a futures contract is, in reality, a bet between two parties, you are not required to come up with the full face value of the contract. You trade futures on margin and you only need to deposit a fraction of the underlying value (the so-called margin). The margin varies from broker to broker and on the current and expected volatility of DAX.

A futures contract is marked to market and hence your trading account gets deducted or added the daily losses and profits throughout the length of your exposure to the contract.

If you have a small account and the position goes against you, you might face what is called a “margin call” where you either have to transfer more money or you are forced to reduce or sell your position. If you don’t comply, the broker might liquidate your position(s) at the market.