Nadex Trade of the Day: Germany 30 (DAX) Strategy Fails on GDP News

Trading into major economic always involves risk, and sometimes it is just wise to sit on the sidelines until the market completely digests the news. Friday was a day when a highly consistent strategy was defeated by the news.

Every morning, I trade the the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. This strategy was based on the observation from a veteran trader who remarked that the 7am 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 the strategy are remarkably simple:

• Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
• If the 7am EST hourly candlestick is BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of hourly candlestick.
• If the 7am EST hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.

This is a very simple strategy that is remarkably consistent. Just be patient and watch the 7am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. If you want to be "super-safe", don't make a trading decision until 8am, after the 7am hourly candlestick has closed.

To backtest this strategy, simply pull up the hourly chart of the DAX, and compare the 7am EST hourly candlestick to the 8am hourly candlestick. On the great majority of trading days, you will notice that if the 7am hourly candlestick is BULLISH, then the 8am hourly candlestick will close ABOVE the 7am opening price. Conversely, if the 7am hourly candlistick is BEARISH, then the 8am hourly candlestick will close BELOW the 7am opening price.

Try it for yourself. You can find DAX feeds on the Nadex charts (Germany 30) or on Investing.com. For those who use thinkorswim, there is no feed for the DAX.

Let's look at the 7am-9am Germany 30 (DAX) trade for Friday, February 27 2015:

Click on Nadex Chart to Enlarge

7:00am - The market was on an uptrend going into the 7am-9am time frame. The 7am hourly candlestick of the Germany 30 (DAX) market opened at 11339.200, and started grinding upward before trading sideways for the rest of the hour. The 7am hourly candlestick closed bullish at 11345.500.

8:00am - Under the rules of this strategy, a 7am hourly BULLISH close triggered a BUY from the first Nadex strike price BELOW the 7am opening price of 11329.200. The following pending/working order was placed:

1. BUY at >11329 (EXP 9AM) (1 contract): Risk $50, Reward $50

In order for this pending/working order to fill, the market needed to retrace significantly to fill the order. US GDP reports were due to be released at 8:30, so it was time to remain patient.

8:30am - The US GDP reports were released, and they missed analysts expectations. The market started to dive sharply toward the pending/working order. The market was behaving like a falling knife, so the decision was made to cancel the pending order and get out of the way. Sure enough, the DAX shot downward past the 11329 strike price and expired out-of-the-money at 11322.100

No harm, no foul, no trade. The pending BUY order was cancelled before the market had an opportunity to fill it. If the order would have filled, it would have lost.

In hindsight, here's how I might have traded today differently

• Wait until the the release of the US GDP News report at 8:30 and SELL the market from the 11349 strike price. This would have required some dexterity, because the market dove pretty quickly, and the market may have offered an unacceptable risk/reward. 

If you strictly followed the rules of the 7am-9am Germany 30 (DAX) strategy, and BOUGHT the market at the first strike price BELOW the 7am opening price, then your trade would have been a loser. Be very careful trading into major economic news.

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The Purpose of this Blog

The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.