Following recent poor performance, and failure to stick to the plan, I have revised my method for intra-day Dow trading. I hope this meets with the approval of those who liked the first strategy (and who were opposed to changes). Furthermore, I hope it encourages further discussion and feedback.
Thanks for contributing!
Instrument: Dow Jones Industrial Average, Daily Cash Spreadbet (CMC)
Period: Intra-day, during the cash market (1430 – 2100 London)
Abstract
A system for intra day Dow trading. The system is to give objective entry and exit signals, and additionally provide guidelines within which to operate. Risk control, money management, and discipline enforcement rules are also included. This system has been designed to take account of rationalisations for rule-breaking, and should therefore present additional barriers to the trader making exceptions.
Setup
Pre – Market
Before the open, familiarise yourself with key S/R levels in the last week of trading, and determine the general trend. A four hour chart, and perhaps trendlines, would be helpful here. Write these down on trading pad (always visible during trading). Familiarise yourself with any news announcements which are due, which may affect the market. In the case of economic data likely to have an effect on the market, ensure you are flat 5 minutes before data is due to be released. Ensure no distractions are likely.
During Market Hours
Do not trade the open. Positions may be taken after the market has settled down.
Fullscreen chart on left monitor. Chart to display: price as candles, EMA (100), DEMA (8, 21), MACD (default), RSI (21), CCI (150), and ADX (default). Right monitor to display blotters, client positions, order tickets, news, and prices for other related instruments (S&P, EURUSD, Crude, Dax, etc)
View a five minute chart. Establish key zones of support and resistance, and price areas where trades would have a high probability of favourable price movement. (for example strong resistance, if tested and respected)
Switch back to a one minute chart. Be aware of trend and momentum. Every five minutes, check 5 min chart. Every half hour zoom out to a 15 min chart for a broader view, but keep this timeframe as a supplemental. (keeping the method simple)
Semi-worthwhile tasks are to be positioned around the trading area to assist with boredom. A few books, juggling balls, weights, etc. Laptop to be within reach in order to read other trading literature, T2W, news sites, general leisure browsing. Perhaps some ironing or shoe polishing could be conducted in view of the screens. I have identified boredom to be an issue leading to overtrading, and also idleness give impetus to act and close trades prematurely.
Trade Criteria
Trades are to be executed according to the following guidelines. A limit of £1pp is in place, except for a pyramiding exception covered below. Maximum daily loss limit is £30, and only 12 pips may be risked on any given trade. Stop and limit orders must be set prior to a trade. Stop loss orders may only be moved closer to the market. Limit orders can move freely, but only in accordence with rules and never closer than initial target. Averaging down is not permitted. Two consecutive losses require a 30 minute break away from the trading area. Three consecutive losses require taking the rest of the day off.
Entries
Entries are to be taken as soon as a signal is confirmed. For all entries, target profit must be at least twice risk amount. Stop and limit orders are to be determined before placing the trade, according to their rules. OCO stop and limits are to be placed prior to entering the trade. Limit orders to enter are preferred, although market orders may be used where it may not be possible to be filled with a limit. In order to enter a trade, at least one condition from category A and one condition from category B must be satisfied. Additionally, if any condition from category C is satisfied, the entry signal shall be considered vetoed.
Category A (Signal)
The 8 period DEMA crosses the 21 period DEMA on a 1 minute chart.
Completion of a high probability reversal chart pattern, such as double top/bottom, head and shoulders, etc. Flags, wedges, and triangles are explicitly excluded.
Category B (Confirmation)
Price has respected a support / resistance level.
Price has respected a strong trend line, defined as three or more contacts on a five minute chart.
Indicator divergence on the 1 minute chart, persisting for at least 15 minutes, supports the signal.
Category C (Veto)
Prudent placing of the stop loss is further than 12 pips away from the entry price.
Target is less than double the SL distance away from price.
A conflicting signal (whipsaw) has occurred within 5 minutes.
RSI is OB/OS (>70 / <30)
CCI is OB/OS (>200 / <200)
Market appears “choppy”, and on checking ADX is < 15.
The signal is contrary to an existing trend, and price action has not showed any indication of reversal.
News is due within the foreseeable life of the trade.
The trader does not wish to trade this setup.*
Exits
The trade will be exited on trigger of the hard stop loss order OR the trade will be exited on the trigger of the hard limit order. The stop loss may only be moved closer to the market. The stoploss is to be moved to breakeven at +10 open profit. The stoploss shall be trailed by 50%. The limit order may be moved at the discretion of the trader, but must never be moved closer to the market than the original setting. (ie, a sell limit opened at 13550 may be moved to 13560, then to 13555, but never lower than 550). The limit order shall only be moved further away with cause.
The initial limit order shall be conservative. The trader may move the limit order away from the market, and manually intervene to exit at any price better than the initial limit. Valid reasons for exiting in such a manner are:
EITHER
8/21 period DEMA crossover on 1 minute chart against the entry direction.
OR
Indicator divergence perisiting for 15 minutes on a 1 minute chart.
CONFIRMED BY
Slowing price momentum, as shown by MACD histogram.
Furthermore, an exit may be triggered by price respecting support, resistance, or strong trendline. A confirmed bullish/bearish formation on a 5 minute chart against the position is also a valid indicator to exit. No manual exit may be worse than the intial limit price. Limits should only be changed after breakeven stop is set.
A trade must be exited within 5 minutes of news releases reasonably likely to affect the market.
Pyramiding
A trade showing an open profit may be subject to the following conditions.
A stoploss of at least +12 has been applied to the initial position.
Entry has been confirmed by a DEMA cross on at least the 5 minute chart, preferably the 10.
The new profit target is at least twice total risk away.
The trend appears healthy (subjective veto of pyramid)
A hard stop can be set such that the full position will be closed at breakeven or better.
Further pyramiding may be applied subject to these conditions for each +20 the price moves in favour of the trade.
Trader Discretion
The trader shall have discretion in the following areas
The determination of stop and target (within reason)
The veto of an entry signal
The veto of a pyramid signal
The moving of limit orders to better prices
Stopping trading early
Holding a trade in the last half hour, although this should be avoided
Taking a break at any time, providing hard stop / limit are in place
Barriers to trading a system
Gamble entries – strictly prohibited
Premature exits due to fear or greed – prohibited due to initial limit
Overtrading – negative overtrading should be stopped by the consecutive losing trade rules
Lack of confidence in position – initial veto, thorough setup
Impatience – distractions in the trading area, ability to take breaks
Failure to properly record the plan, and failure to trade it – this must be counteracted by noting pertanent information in the trading notebook which is kept in sight.
Changing the rules on an ad-hoc basis. The rules here seem reasonable enough that they should not be changed. Plan can be altered outside of market hours only, with just cause.
I am trying to keep this simple. However, I think it is more important to remove as much discretion as possible at this stage. The plan permits trader intervention only when flat – the plan must be recorded prior to trading and executed during the trade. Use of stops and limits allow breaks to be taken when reckless interference becomes necessary. Expectation of accountability should re-enforce rules. Rules protect trading capital, and allow profitable entries. The overtrading should be naturally corrected by the system making few trades (due to confirmations).
Does the KISS principle apply to a 1500 word plan? I hope so. Money management and risk is pretty simple. Determine stop / limit, enter on signal with confirmation, exit at limit (or at better price). Trail stops to lock in profit. No “bad trading”. Plan the trade, trade the plan.
I can understand if many of you have limited faith in my ability to execute this to the letter. I hope you can see how I have attempted to minimise the risk of breaking the plan. Please tell me of any glaring errors or omissions – I've been working on these rules for about 8 hours in total today, and it is 04:30 BST.
As ever, feedback is encouraged.
Thanks
~LL
* - I'm still the captain of the ship, despite any plans. If I do not think a trade has sufficient potential to justify the risk, or I do not like then entry signals, I can refuse them. I am open to suggestions why this may not be a good idea, but it makes sense to me. It is better to never enter a trade when unsure, rather than exit at a bad price due to lack of confidence in the setup.
