Intermarket Trading Strategies

6

European Indices

A little uncertainty is good for everything.

-Henry Kissinger

6.1 THE DAX

Trading in DAX futures has recently become very popular among US traders as it provides an additional liquid market to trade. The main advantages are currency diversification and a wider range of trading times. The German futures exchange (Eurex) is open 14 hours a day from 8:00 to 22:00 CET (02:00-16:00 US EST) and the longer trading times are convenient for both Australian and US-based traders. You can find an intermarket system for trading DAX futures in Chapter 13, but in order to make modifications or design your own system you will need a thorough understanding of its correlation with other international stock indices, currencies and commodities.

Correlations between the DAX and major international indices, forex and commodities are depicted in Table 6.1 and correlations with other European indices in Table 6.2. The DAX correlated best, with the Euro Stoxx 50. This was not surprising as both indices had a number of common component stocks. The second best correlation was with the French CAC 40 index, as both nations-whether they like it or not-are joined in the economic community. American indices had to be shifted back one day in time in order for the correlation values to have some predictive usefulness for the DAX, as all American exchanges closed 4½ hours later. An alternative approach would be to correlate the DAX opening price with the previous day’s closing price of the ...