[Sean]

The following trade on the DAX/GER30 was taken using simple technical analysis employing classical chart patterns, simple moving averages, and simple support and resistance lines.

Context and trade description:

As most market observers will know, equity indices have recently come under pressure in the last week, since around 14 December, 2022. However this week there has been what might be called an oversold bounce.

To identify the start of this bounce, I first employed higher timeframe analysis on the daily, then one hour charts. As shown in the second image, the higher timeframe analysis on the one hour chart, you can see that price has formed a powerful V-shaped reversal on December 20. This is a kind of washout move which can signal short-term reversal. Further support for this view is given when price follows-through to the upside and takes out several key moving averages.

Having established a bullish bias, I then looked for a pullback within the uptrend. This opportunity came when price reversed down off the critical horizontal level at 13976.38. Price comes down to the 15m, 200 bar SMA and bounces to the upside, again in a forceful, V-shaped manner, which is suggestive of another reversal. The reversal to the upside is confirmed when price forms a kind of flag consolidation zone, then breaks to the upside with force. The entry is at the close of this flag breakout bar, and the stoploss is placed just below the top of the flag zone.

Now that we’re in the trade, we might expect that price will at least travel to the critical 13976.38 level. After it reaches this level, it breaks down through the level with force. At this point, I exited the trade at the close of the breakdown bar.

Several reflections on this trade and room for improvement:

The exit wasn’t ideal. You can see that although I managed to get a roughly 2:1 reward to risk ratio, I could have taken profit closer to the high. I didn’t do this because often price will just keep going, so I wanted to wait for confirmation that the momentum was lost. However, I probably should’ve been more aggressive with the exit, given that price was weakening well before 13976.38 was pierced.

Another strategy would be to just hold for the longer-term, and view this is a swing trade, rather than a day trade. DAX ended up going way higher, which would’ve given me a much higher ROI. Higher timeframe analysis shows that DAX is trending up, so it is not surprising that we see sustained higher prices after the entry point. However, psychologically, I find it difficult to hold through extended consolidation periods, as there is a risk price will reverse and take out gains. Nonetheless, holding and taking that risk may very well be the best strategy.