European Trading Strategies: Backtest Analysis

With the world getting increasingly connected online and many regions opening up their financial markets to the global investing community, it is now easier to diversify your investment portfolio into other economies. And the European market is an easy choice for portfolio diversification. But what are European trading strategies?

There are different ways to gain exposure to European trading strategies. You can invest in exchange-traded funds (ETFs) or directly trade the stocks via international brokers like Interactive Brokers. If you live in the US, you can also invest through American Depository Receipts, which trades on the OTC markets and can easily be bought via your broker.

In this post, we take a look at European trading strategies and we finish the article with a backtest.

How can you trade European markets?

Smart investors like to diversify their portfolios beyond different industries and sectors in the same jurisdiction. Gaining exposure to international markets helps to reduce risks, and the European market, being home to many of the world’s leading corporations, which have rewarded shareholders with decades of capital appreciation and dividends, presents an attractive choice.

With deregulation in the financial markets and online trading platforms, you can easily gain exposure to the European market. Here are the four common ways you can do that:

  1. Exchange-traded funds (ETFs): One of the easiest ways to invest in the European market is to buy ETFs that track the European markets. Such ETFs invest in stocks whose companies are headquartered — or do a large percentage of their business — in Europe. In fact, there are many ETFs that track the market indexes of various European markets. Investing in such index funds offers the advantages of broad diversification at a lower cost than you might otherwise be able to obtain by attempting to build the positions directly.
  2. Depository Receipts: Another easy way to invest in European stocks is to buy their depository receipts in your country of residence. A depositary receipt (DR) is a negotiable certificate issued by a bank that represents shares in a foreign company that is traded on a domestic stock exchange. The depositary receipt allows you to hold equity in foreign countries and provides an alternative to trading on an international market. The American depositary receipt (ADR), which has been providing companies, investors, and traders with global investment opportunities since the 1920s, is one of the most common types of DRs. If you live in the US, you can easily buy an ADR of a European stock on the OTC market via your broker.
  3. Directly trading the stocks: Purchasing stocks on foreign exchanges is more difficult than purchasing ADRs, but it is possible. Several online brokerages provide special services that allow you to buy and sell securities directly on select international markets. One broker that offers access to most stock exchanges around the world is Interactive Brokers. Another broker that offers access to trading European stocks E*Trade. If you are not a client of either of these firms, you should inquire with your broker about direct access to European stocks.
  4. European stock CFDs: Although not often recommended, you can trade European stock CFDs via a CFD broker, such as IG, eToro, and so on, if your interest is just to gain from price movements rather than own the underlying stocks. This option is best used for short-term trading and speculation, not investing, as it does not offer you the ability to own the asset.

European ETFs (stocks, currencies, etc)

If you live in the US, there are many European ETFs trading on US stock exchanges. These include equity ETFs and currency ETFs.

The best strategies can be found in our….

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Backtested trading strategies

Equity ETFs

These are a few of the stocks-based ETFs you can trade on the US stock exchanges:

  1. Vanguard FTSE Europe ETF (VGK): VGK offers broad-based exposure to the developed economies of Europe, spreading holdings across more than a dozen markets. If you are seeking exposure to developed European economies, this ETF is a good option. It offers balanced exposure across countries, sectors, and individual holdings, and with nearly 500 component securities, concentration to any one name is low. Interestingly, the expense ratio is among the lowest, making VGK one of the most cost-efficient ways to access developed Europe’s equity markets.
  2. SPDR EURO STOXX 50 ETF (FEZ): FEZ tracks the Stoxx 50 index and is one option available for investors seeking to establish exposure to the economies of the eurozone. Compared to the all-inclusive European ETFs, such as VGK, FEZ seems too targeted and may not offer as much diversification as the former. It focuses on large-cap stocks and holds only 50 stocks, it may not be well diversified for long-term portfolio holding. However, the ETF can potentially be useful for short-term trading.
  3. iShares MSCI Germany ETF (EWG): This ETF provides investors with exposure to the German market by investing in securities that trade on the country’s national stock exchange. Given that many of the large caps in EWG are likely to be found in other EFA holdings, the fund is not suitable for investors seeking broad European diversification. EWG is probably the best option available for investors seeking high levels of exposure to the German market in particular. The Swedish market has been one of the best-performing markets over the last 50 years.
  4. iShares MSCI France ETF (EWQ): This ETF provides investors with exposure to the French market by investing in securities that trade on the country’s national stock exchange. Given that many of the large caps in EWQ are likely to be found in other EFA holdings, the fund is not suitable for investors seeking broad European diversification. However, it is probably the best option available for investors seeking high levels of exposure to the French market in particular.
  5. JPMorgan BetaBuilders Europe ETF (BBEU): The JPMorgan BetaBuilders Europe ETF (BBEU) is an exchange-traded fund that tracks an index of hundreds of European stocks. The index is designed to capture the top 85% of European equity markets’ float-adjusted market capitalization, so it excludes many of the small-cap European companies captured by rival funds such as the Vanguard FTSE Europe ETF (VGK). JPMorgan’s BetaBuilders ETF lineup is priced to compete with other low-cost providers of core portfolio building blocks. BBEU provides diversified exposure to European equities at a low cost, though investors seeking small-cap exposure may prefer the competition.

Currency ETF

The one popular currency ETF that offers exposure to the euro is Invesco CurrencyShares Euro Trust (FXE). The FXE provides exposure to the euro, the eurozone’s official currency, relative to the US dollar. It increases in value when the euro strengthens and decreases in value when the dollar strengthens. The fund may be suitable for investors looking to hedge currency risk or bet against the US dollar. FXE is the only real ETF available to investors seeking exposure to the EUR/USD exchange rate.

We don’t recommend forex trading. Almost no one makes money trading forex, despite all the fuzz. Your odds for success are substantially better in the stock market.

How many European markets can you trade?

You can trade most European markets with the right vehicle. You can trade the German market, French market, UK market, Netherlands market, and so on.

While ADRs may limit you to the big and popular European stocks, Brokers like Interactive Brokers offer access to most stock exchanges in Europe, such as the London Stock Exchange, Frankfurt Stock Exchange, Euronext Paris, Italian Stock Exchange, and so on, and through them, you can trade most stocks in most European markets.

With a European ETF, you can gain exposure to any European market of such or get diversified exposure to most European markets. For example, if you seek to make a pure play in the French market, you can trade the EWQ, but if you want a pan-European diversified exposure, you can invest in Vanguard FTSE Europe ETF (VGK), SPDR Portfolio Europe ETF (SPEU), iShares Core MSCI Europe ETF (IEUR), or JPMorgan BetaBuilders Europe ETF (BBEU).

What are the biggest European markets?

In terms of the size of the economy, the top three European markets are Germany, the UK, and France. But in terms of stock exchanges, the biggest stock exchanges in Europe are the Euronext, London Stock exchange, Frankfurt Stock Exchange (Xetra), SIX Swiss Exchange (which operates Switzerland’s major stock exchange), and Nasdaq Nordic (which is composed of Scandinavian and Baltic stock exchanges).

According to Statista, Europe’s biggest stock exchange is Euronext which combines five markets based in Amsterdam, Brussels, Dublin, Lisbon, London, Oslo, and Paris, where it is headquartered.

European trading strategies
Source: Statista 2022

When are European markets open?

European markets are open during weekdays that are not national holidays in their various countries. Euronext and Frankfurt Stock Exchange open Monday through Friday by 8:00 am Central European Standard Time (GMT+01:00), while the London Stock Exchange opens by 8:00 am GMT.

When is the European trading session (GMT)?

Since Europe does not have a single stock exchange, the exact trading hours will depend on the stock exchange of interest. European stock markets typically trade between 7:00 am GMT when Frankfurt opens and 4:00 pm GMT when the London market closes. As usual, the time shifts forward by an hour during daylight saving time.

Can you trade European pairs?

Yes, you can trade the currencies of European countries that are not making use of the euro. Such currencies can be paired with the euro or any other currency. For example, you can trade EUR/GBP or EUR/CHF.

European trading strategies backtest

We used to trade several European markets, but we have restricted ourselves to only trading the DAX-40 futures. Initially, we had reasonable success trading the Italian MIB futures, but due to the high correlation among the European markets, we decided to narrow our focus. Overall, the correlation between all the European stock markets is very high. If you trade DAX-40 you must be careful in getting overlapping trades in EuroSTOXX 50, for example.

We have presented, so far, a couple of trading edges in DAX-40 for our annual trading edge subscribers. The DAX is a fantastic trading vehicle that trades differently than the S&P 500 and thus might offer some diversification benefits to your portfolio of trading strategies.

Both of strategies are overnight trading strategies and below we present two such DAX strategies backtested with statistics, historical trading performance, and metrics.

The two specific overnight trading strategies below buy at the close of the stock market session (1730 local German time) and exit the next day at 0900 local time when the stock market opens.

European trading strategy no 1

Because the strategy is exclusive only for our paying subscribers, we don’t want to reveal the details of the trading rules or the settings. However, we provide you the equity curve below:

European trading strategy

There are 172 trades and the average gain per trade is 0.2% – a huge margin of safety for commissions and slippage. The statistics indicate a win rate of 64% and the profit factor is 1.9.

This is a strategy we have been trading live for many years and it’s still working pretty well. Click here to access the strategy.

Let’s go on to the second backtest of the day:

European trading strategy no 1

As mentioned, this is also an overnight trading strategy. Let’s go straight to the equity curve:

European trading strategies backtest

Again, this is a decent strategy where the 303 trades have generated an average gain per trade of 0.23%.

Click here to access the trading rules of the strategy.

European trading strategies – combined

Let’s backtest how the two strategies perform together (a combined equity curve):

European trading strategies trading rules

We would argue these are solid strategies that have profit and losses that are uncorrelated to the overall market direction – exactly what you’d want.

European trading strategies – conclusions

The European market is big and offers equity indices, bonds, and forex for ETFs and futures.

We are particularly fond of DAX-40 futures because of the big moves and that the contract is not so correlated to S&P 500 as many traders imagine. Any data-driven trader should test the DAX contract! Of course, if you are based in the US or some other continent you have a time difference that might be problematic, but that is why you want to be an algo trader (to limit this obstacle). Thus, we recommend exploring some European trading strategies.


How can I trade European markets, and what are the common methods?

European trading strategies involve investing in European markets to diversify your portfolio. Considering the diverse economies and leading corporations in Europe can help reduce investment risks. You can trade European markets through ETFs, depository receipts, direct stock trading, or European stock CFDs. Each method has its advantages, such as broad diversification or direct ownership.

What are the best European ETFs available for trading in the US, and what do they offer?

American can trade European currencies using ETFs. An example is the Invesco CurrencyShares Euro Trust (FXE), which provides exposure to the euro relative to the US dollar.Some notable European ETFs include VGK, FEZ, EWG, EWQ, and BBEU. They provide exposure to developed European economies, the eurozone, and specific countries like Germany and France.

How many European markets can I trade, and what are the options?

You can trade various European markets, including the German, French, UK, and Dutch markets. ADRs may limit you to popular stocks, but brokers like Interactive Brokers offer access to multiple European stock exchanges. Trading European stock CFDs can be suitable for short-term trading and speculation, not long-term investing. It allows you to gain from price movements without owning the underlying stocks, but it comes with higher risk.

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