Intermarket Trading Strategies

13

Trading DAX Futures

There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.

-Mark Twain

 

In Chapter 6 we discussed the relationship between the DAX and major international indices and commodities. I will now use a related index with the highest correlation with the DAX in order to develop an intermarket divergence system to trade DAX futures.

A close inspection of Tables 6.1 and 6.2 reveal that either the CAC 40 or the EuroStoxx 50 would be a good choice. The correlation between the DAX and the CAC was slightly better on absolute price basis but the EuroStoxx, on the other hand, was a little better when taking daily and weekly yields. This was also the case between the corresponding index futures.

The dilemma was resolved by testing. Both the profit factor and total profits suggested that the CAC 40 was more effective in predicting the DAX. It seems that the traditional historical antipathy between the German and the French people does not extend into their markets as, whether they like it or not, their economies are linked together in the European Union.

Another factor that influenced my decision to select the CAC is the fact that the EuroStoxx shared no less than 13 common component stocks with the DAX, which can reduce its predictive correlation.

The same problem inherent in all divergence models (discussed in the previous chapter) was also encountered here, as the system generated only 22 signals during the 4-year testing ...