US News Bullish, so Let's Trade Germany
US 3rd quarter growth rose to 2.9%, the highest in two years. It's a sign the US economy is on a steady track. Instead of jumping on the bullish headlines, consider an unconventional idea: trade the lackluster German DAX instead.
By Vikram Rangala
Friday, October 28, 2016 - 00:00
The DAX, really? Yes, really. It's sideways and dull and because of that it can be an awesome opportunity, particularly for binary options and spread traders. That's because the all-or-nothing profit outcome of binaries means that even a small move in the underlying market, to the profit side of the strike price line, can yield the full $100 payout.
Germany's GDP has been sub-one-percent for over four years and sub-zero twice during that period. While the German economy is the industrial powerhouse of Europe, it still lags the US and lags behind the growth rate some analysts think Germany is capable of. On Tuesday, The Wall Street Journal published a report which began, "German companies are sitting on a half-trillion dollars of cash but are reluctant to invest it in their own country, potentially threatening the country’s competitive edge and European economic growth."
What companies call "saving" is also sometimes called "sitting on" or "hoarding" cash. Companies do it for the same reasons you and I might do it: worry about a rainy day to come and a lack of confidence about the future. Too much saving can be a sign you think you're in trouble.
When you think of German companies in trouble, you probably think of Volkswagen AG, the car maker facing lawsuits in over 20 countries within the EU for cheating on its diesel emission tests. VW has cancelled or put off all but some core investment projects, most likely because it expects to have some legal fees and penalties coming up.
Other companies have other reasons, but the net result is that many of the DAX-30 stock index companies are also avoiding the kinds of investment that would allow them to expand and thus lead a larger economic expansion in Germany and Europe. Their reasons go beyond the usual caution during dips in the economic cycle. German unemployment is at a record low, banks are lending at very favorable rates thanks to the ECB's zero-rate policy. And business sentiment is at its highest since mid-2014.
The result of this for traders is a German stock market that is doing a whole lot of nothing, day after day, with occasional big moves. the DAX chart looks decidedly different from that of any US index.
That sideways price movement contains the opportunity for traders of limited-risk instruments like Nadex binary options. If the price at expiration (the red vertical line at 12PM ET) is about the same as it is in the chart image above, between the strike prices of 10676 and 10694, a trade in the DAX futures would be unprofitable.
But a binary option trader has a number of strategies available. If you believe the price will break out of that range, you can buy the upper strike price or sell the lower one. Since you can exit before expiration, you might simply exit once the trade shows a small, quick profit. That's a fairly simple, but workable approach.
You could also sell one or both strike prices, based on your view of where the market might be. Finally, you might buy or sell a Nadex spread, which is designed for trading price ranges using a single instrument. If you haven't explored Nadex spreads, you should. They may be the best way to trade that you never heard of.
This doesn't mean the US stock market doesn't also offer opportunity. A strong rally is always an opportunity, including for those who try to fade the corrections along the way. The S&P 500 (Nadex US 500) had a great rally after 3rd quarter GDP growth was reported to be a strong 2.9%.
One of the challenges of trend trading is that by the time you know a trend is happening, you're no longer at the start of the trend. You might be in the middle of a trend that is going to continue for another (profitable) run. Or you might be at the very top or bottom, where entering a trade would be a mistake.
Every trader has to find methods for solving this question and deciding whether the trend is your friend or it's about to end. But sometimes the best solution is a different market. And that might even be a market with barely any trend at all.
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