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A Common Mistake to Avoid Trading the Nadex Germany 30 (DAX) Strategy

TradingPub Admin | January 26, 2015

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A veteran trader once observed that the 7 am EST hourly candlestick of the Germany 30 (DAX) Index is a pivot point that determines the direction of that market for the next hour or so.

The rules for this are extremely simple:

  • Select the 7 am-9 am Nadex time period
  • If the 7 am EST hourly candlestick is BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of hourly candlestick.
  • If the 7 am EST hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.

This simple strategy works the great majority of the time. In the past 20 trading days, this phenomenon occurred 19 out of 20 times. Sounds simple, doesn't it?

DAX Strategy Trading Chart
DAX Strategy Trading Chart

Here's an hourly chart showing four successive days of this strategy. Arrows are pointing to the 7 am EST opening of the Germany 30 (DAX) Index. Can you see how the 8 am hourly candlestick is influenced by the direction of the 7am candlestick? That is the essence of this strategy, and it is extremely simple, but sometimes mistakes can be made.

Common Mistake: Placing Your Trade Too Early
For this strategy to work, you must have complete confidence that the the 7 am EST Hourly candlestick will actually be bullish or bearish. Sometimes it can take almost a full hour for that to happen.
DAX Strategy Trading Chart
DAX Strategy Trading Chart

In this 5-minute chart, the first four candlesticks were bearish on a major news day with a EUR Interest rate decision at 7:45 and an ECB Press Conference at 8:30. Investor sentiment was jittery ahead of the news.  It would have been easy to assume the market was going to be bearish after the first 20 minutes of trading, and to place a SELL order. But the 7 am hourly candlestick opened at 10296 and closed at 10306 for a bullish close.

In this example, if you had placed a pending/limit order to SELL at 10307, risking $50 to make $50,  you had exactly 45 minutes to change your mind. When the 7:45 interest rate decision was announced, your order would have been filled. You would have been stuck with a losing trade unless you had the dexterity to bail out at 8:50 when the market spiked back down briefly in your favor. It would have been a messy, nerve-wracking trade.

But the 7 am hourly candlestick was bullish. If you placed a BUY order at 10287, or even 10267 (if you wanted to trade deep into the money) you would be on the side of the rules of this strategy. The 7 am hourly candlestick was confirmed bullish at 7:55 am, almost a full hour into the session, after the interest rate news. Now you have some options. You can place a BUY market order and take what the market gives you (probably $80 risk, $20 reward), or you can place a limit/working order, risking $50 to make $50. Either plan would have worked in your favor. The huge bearish candlestick at 8:50 would have filled your order, and the next candlestick allowed you to exit safely in the money for a full profit at expiration.

This is really a lesson in patience. If you can, try to avoid the temptation of getting into this trade too early, especially if the 7 am hourly candlestick develops slowly. Sometimes this hourly candlestick develops really slowly, with tiny, sideways moving 5-minute candlesticks. When you see this happening, it's better to wait, unless you are trading really deep into the money.

Tip: If you are watching the 7 am time period develop on a 5-minute chart, try displaying the hourly chart on another screen to see how the hourly candlestick is developing. If it becomes convincingly bullish, and is supported by your favorite indicators, then BUY. If it becomes convincingly bearish, then SELL. If it's a Doji, keep waiting. Does that make sense?

If you want to be "super safe" with this strategy, then wait until 8am to make your trading decision. It may limit your risk/reward opportunities, but you will know without a doubt whether the 7 am hourly candlestick was bullish or bearish. If the 7 am hourly candlestick is a Doji, keep being patient. In all likelihood, the direction of the market will reveal itself before the 9 am expiration. If it doesn't, then just avoid trading this strategy altogether.

Other trading mistakes including trading against a strong uptrend or downtrend, and trading into the news. These mistakes will be discussed in future blog posts. Stay tuned.

The 7 am-9 am Germany 30 (DAX) Strategy Explained:

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Cheers, 

The Trading Pub Team