Day Trading the Dow Jones, DJI

Transcription

1 Day Trading the Dow Jones, DJI Enter a trade on a confirmation of a break of the 100EMA, which is when the price pulls back towards the 100MA and then continues in the direction of the breakout. Stay in the trade all the time that the price is "beyond" the 100MA. Exit the trade on confirmation of a TOP or a BOTTOM. OR... Exit the trade when the price has broken the 100MA in the opposite direction PLUS 20 points IF you are in a trade AND the price is within + or - 20 points of the 100MA, DO NOT EXIT a trade. Remember, all the time the price is outside the 100MA (+/- 20) we DO NOT panic an EXIT. DO NOT ENTER a Trade a trade if CCI <-200, >200 or RSI <20, >80 The reason is this, at these points we can experience major volatility. Look at figure 1 when the price pulled back at 8220 and CCI was at 200. You may be tempted to go long here. Bad move. A clear bounce off RSI 22 as well. The open saw RSI drop to 18 or so and that fixes the low of the day so you have to be prepared for a drop back to that level. At these extremes, you need to wait for price confirmation, i.e. a higher high AND a higher low before going long at extremes of RSI and CCI. Remember this strategy is about safe trading, not suicidal gambles. Consistent small wins are the road to riches. The name of the game is to MINIMISE losses and let WINNERS run. Secondary to this is trying to get the odds in YOUR favour of making a successful trade, as opposed to a gamble. We'll find out what tops and bottoms we can expect to see, how we can calculate each mini move with expected targets and how we can analyse the risk we are taking by staying in a trade as opposed to exiting. DONT look at the Spread Bet price until you are ready to close your trade. Basing your decisions on the SB price will just freak you out of a trade. Now and again, it will undoubtedly cost you a bit more as we enter a "bad" trade. Hopefully, on balance, the number of good trades will more than cover you! Our typical targets will be points. Those of you wanting to take a longer term view and are not averse to holding overnight, you can apply EXACTLY the same rules to the 10 Min chart with the same results. FINAL RULE. As one door closes, another one opens- NOT!!!! Just because we exit at a top, or a bottom, this is NOT a signal to reverse the trade. WE ARE NOT SCALPING!!!! When you close a winning trade, sit back and congratulate yourself. Take time to see if the action continues in your favour. Did you get out early? Where will we find our next entry? One of the keys to trading is to be constantly assessing your opinion and the situation, W.D. Gann once said, Always be prepared to have a change of mind. Chart settings 1-Minute Charts for DJI 100 Exponential Moving Average CCI 150 RSI 14 Stake Size The important thing, especially when you are first starting out, is to make sure that you Stay in the Game as most of your learning will come when you re actually trading. The accepted level of risk amongst the professional traders and the trading authors is 1% of your capital on every trade. When your risk increases, any bad run that you have will be magnified. You should reduce the stake size to the point where you are very comfortable with the level of loss that a triggered stop will cause.

2 On a gamble entry, reduce your risk. IF the 100MA later CONFIRMS your entry is CORRECT, increase your stake to "normal size" by adding another half stake. Entry s Safe entry & safe reversal The safe entry is from the price crossing of the 100ema line and waiting for the pull back. For reversing a position this is also the criteria that is used. Figure 1 Exits Tops and Bottoms Now that we have found an entry we need to check out RSI and CCI to see if we can pick out an exit. If are getting positive divergence, price down, TA up. Alarm bells need to start ringing. Would this continue? The first rule for Positive Divergence (PD) confirmation is that there should be 3 peaks lining up in the price AND in either RSI or CCI OR, better still BOTH. The second rule here is that the timescale MUST be a MINIMUM of 25 minutes across the 3 peaks. If a divergence started at the open it should always be ignored. The 3rd low is your first signal to exit the trade. Usually you MAY get one more chance to exit before the whole thing goes in the other direction, but don't count on it. Don't be greedy. Getting out on the 3rd peak of a 3-pk divergence is usually the very best EXIT. Now we need to look for another entry. This could be a LONG or a SHORT. We don't care. Don't be pre-conditioned into thinking a short has to be followed by a long and vice versa! The reverse is true for Negative Divergence (ND)

3 PD & ND Exit s The exit decisions for both ND and PD s are clearly shown in figure 2. The first exit is from an ND over 37 minutes. At the same time this is forming we are looking for an entry from the open of the trading day. Five possible entries are marked although by around 15:45 the final peak is formed in the ND and an exit should be taken. The next entry is a safe entry from a pull back to the 100ema. Once again a PD bottom starts forming over 45 minute and an exit should be taken at the third trough. Figure 2 Short term PD & ND Short PD & ND is quite simply the same as the usual PD & ND. The main difference being that it is only an indication of a short-term reversal and is in no way a major indicator for a top or a bottom. In figure 3 we can see a three-peak ND top, which is only across 20 mins so no action to be taken. The short PD bottom indicating a short-term reversal confirmed a no action choice. Figure 3

4 Gamble entry As with all aspect to this strategy, simplicity is the key. A gamble entry is simply taking an entry from anything other than a safe entry from a pullback to the 100ema. The most common would be to enter from a PD or ND. Instead of just exiting at the PD or ND you would look to take a GAMBLE reversal entry at this same level. On a gamble entry, reduce your risk. IF the 100MA later CONFIRMS your entry is CORRECT, increase your stake to "normal size" by adding another half stake. Other examples of this would be an RS/SR switch, a head and shoulder reversal or a W bottom. In all cases the target should be taken into account as a small target would not make the gamble worthwhile and a safer entry will be worth waiting for. SR & RS switches SR and RS switch is the change in Support to Resistance or vies versa in RSI. There are a few good examples of this. Figure 4 shows a close up of a classic RS switch. Looking again to Figure 1 RS and SR switch in both CCI and RSI can be seen very clearly. An RS or SR switch can be used in the assessment of a gamble entry. In Figure 4 we can see a change in the resistance becoming support (RS switch) but in this case it is coupled with a PD bottom giving more strength for the gamble entry to go long, later confirming a safe entry from the 100ema Figure 4 Targets & Patterns The purpose of this section is not to explain TA patterns and targets but to demonstrate how they fit into the 100ema trading strategy to maximise the most out of your trading. There are numerous other formations these are some of the more common formations and further reading should be sought from the weekly commentary on the bulletin board for more detailed explanations and Q & A s. Target calculation is a key tool in your arsenal. Without it, you will be missing a lot of points. The numbers are never exact. Expect to be a few points under or over. In any case, the following example happens to fall on some very convenient numbers. Usually you get odd numbers. When trading you need to make a quick approximation at first. Then, as the move progresses in your favour, take time out to try and get exact as you can. You should always be looking for traditional TA formations, but

5 DON'T look too hard. If it doesn't jump out at you, it probably isn't there. Remember, as you have seen, that a move can "develop" into a different formation from that which you originally saw. Figure 5 Flags Flags usually have 3 cycles, with the breakout coming off the third cycle to the upside in a bull flag. The reverse is true for Bear Flags. In figure 5 the first 3 legs up have targets of 100 points from the lowest price in the pullback. Rise 4 is only 80 points this is a clue that it s weakening. Add this 80 to the low = For each leg up, for the move to continue, the price MUST CONFIDENTLY reach the target. By this I mean no dithering in the middle. (As in the 7860 region.) If you reach target, you will soon get a pullback, here you have 2 choices exit or stay. In the final leg, 8,9, the target was 8100, which fell short. But we expected that, didn't we...? Triangles Triangles have the same target calculations. Take the MOUTH and add it to the break to the up side, or take it away from the break to the down side. Forget the shape of the triangle - they all mostly work. Bull Triangle You take the size of the "Mouth" and add it to the trend line at the breakout point. In figure 6, (as is often the case in a bull triangle) it is the horizontal resistance line. IF it breaks to the downside, take the mouth value away from the support break trend line to end up with your "short" target. The target is usually met by the time the triangle lines (theoretically) would have reached a point. The breakout point is usually defined as occurring between 60% and 75% of the distance from the start (mouth) and the theoretical apex. Note there are almost always three cycles in the triangle before the breakout. The 3rd low cycle was at You will often get a clue about the direction of the break by looking at RSI and CCI and also where the 100MA line is relative to the body of the triangle. I call this the "balance of power" in the triangle. In this case, the balance was below the 100MA, and could have lead to a break to the down side. Here, the final overriding clue was the early small false break to the upside, followed by a dip, NOT to the support line and NOT breaking the 100MA. (The middle "confirmation pullback"). WATCH out for the false BLIPS!!!!

6 Figure 6 Bear triangle As it's at a top, we EXPECT it to have the balance of power ABOVE the 100MA. (In the previous example, it was a bottom, so the BOP was BELOW the 100MA). The BOP comes into play in a sideways market, where it may give you a clue to the exit direction. Don't guess it! You already know how big the move will be from the mouth. Just be prepared, and know where the target will be when it goes. Figure 7

7 Expanding Triangle This is a "reverse triangle" or "expanding triangle". These often lead to high volatility. Four days of dithering and one day of massive rise. Same rules, same targets. No doubt, many would have been surprised had they not checked their longer-term timeframes... BEWARE of these Intraday. They are swift, ruthless and will eat you alive! Figure 8 Pullback Figure 9 Treat it just like a bull flag (or bear flag). The main difference is that it occurs as part of a big push up, where the price needs a breather and the mm's to grab back a few shares so that they can continue to have move shares available as the price moves up. You will only get something like 1-4 ticks of pullback. In the example here, the pullback is minute, but defined. The target is ( ) = Note that pullbacks work on the way down too - same rules. Magic Numbers The "magic numbers" are 32 and 64. It is an observation over considerable time, that the Dow frequently has a pause or a minor test at these two numbers. There is no explanation as to why this should be and they occur as if by magic

8 Other considerations RSI strength of move Take the move in RSI in this case, from 72 to points. Take the point s move in the DOW. In this example from 7470 to points. IF you get 1:1 correlation, the move is AVERAGE. IF you get: 1.5: 1 the move is STRONG. So a 40 point move in RSI should give a point move in the Dow of >60 points for a strong move. Strong moves don t go pear shaped if you are on the right side of the trade. To make it simpler take the number of points the market has moved and divide that by the number of points move in RSI. >1:5 the move is strong and unlikely to go wrong. <1:1 the move is week RSI considerations Be careful about declaring RSI <30 as well oversold. You need to take note of RSI values throughout the day. IF the low today was 12, then you can't say 30 is oversold... BUT next week, sometime, that statement may well be true. For example if the low is at 9180, RSI was at 12 it would be difficult to consider the RSI at 30 as being oversold. Indicator Patterns We can see the same formations in CCI and the RSI, which they will often breakout before the price action giving us valuable clues as to the possible direction and timing of the move. The best way to use these indications is by confirming an opinion formed by the price action. For example you can get an earlier exit from the first long, in figure 10, just as the triangle in both CCI and RSI breaks down before a safe entry is confirmed by the 100ema. A gamble entry could be considered at this point but as the 100ema is so close, waiting for a safe entry will not loose many points in this example. Additionally there is an H&S reversal pattern that has formed at the same time. With several pieces of information all pointing to the same thing the exit was a good decision to close the long and the decision for a gamble entry short is also a reasonable entry. Figure 10

9 Continuation of TA For the continuation of TA other that support and resistance levels you should essentially be looking for today s open to be as close to yesterdays close as possible for a continuation of yesterdays closing analysis. Figure 11 & 12 show the long-term support and resistance lines and those same levels for the following days trading so you can really appreciate that they ARE important, once they are established. In this case, 8510, 8550 and 8580, the latter going back to 2nd May. Figure 11 Figure 12

10 Cross-market analysis, Dow ES These are all simple tools that you can use to get the most out of the information that is in front of you. Cross-market analysis is another in a vast array. We can note in figure 13, that there is a double top formation on the Dow but if we compare this to the mini S&P in figure 14, we can clearly see a 3- peak ND top. Not so convincing from the Dow alone but the mini S&P make for a complete picture. Figure13 Figure 14 The bigger Picture All the same rules apply for the longer-term picture. A quick look at where we can get some support and resistance first. A divergence set in early on in the day and continued throughout, it's reasonable to presume that there is support at 8480, which coincides with the triangle target. Why is this important? So we can be prepared to make a trading decision. If we are aware that there we are in a target area with PD developing we can be confident that a strong support zone in this same area. Figure 15 Putting it all together The early bull flag at 15:00 signalled a good entry on the break but soon became quite volatile, requiring a sharp eye to get out and short before taking on the "safe" long (3 options around 8020). The triangle set the target for the rise to 8090, which was duly delivered and also set up the first part of the

11 Negative Divergent top. As it turned out, there were multiple exits possible here, all within a few points ending with the fourth peak. The safe entry short was soon confirmed after that and a rapid drop to 8025 followed. The only clues for a possible early exit here was the RS switch in CCI and RSI. Figure 16 Another good trading day with plenty of action to see how it all fits together. Be patient and wait for something to develop in TA to get some pointers as to where we were going. That eventually developed, giving three separate targets between 8305 and The triangle, then the bull flags then the pullback. All went well till then you should have spotted two things developing. 1. A possible H&S developed. This got "cancelled at 20:09 as the price pulled away from the support line drawn in...(8301 was the target). 2. The peak at 8317 should have got you looking for possible divergences setting in, which there was, in both CCI and RSI. Now here's the crunch. One would have expected a third rise to complete the negative divergence. It didn't happen. The time frame was correct at 24 mins. As soon as the price broke the support line from the H&S that should have made you hit the sell button. I got out for a measly 2 points. IF you missed that exit, you would only have lost 30 points max from there... so no big deal. Those that got in early should have made close on 100 points. Figure 17