An exercise in Trading the DOW

ChartMan

Legendary member
5,580 46
I have just finished an excercise in trading the dow.It gives me a lot of confidence in so much as I devised a very simple test method, and a few simple rules to resolve "indescision". These rules involve RSI,CCI and TCI and I will explain them later.
The basic system works by trading the DOW against a 7 day moving average. I don't think it makes much difference if it is standard MA or ESA. It doesn't seem to matter too much either using 7day or 14 day, or anything inbetween.The difference is one will whipsaw you a bit more(7 day) the other will lessen short term profits.The reasoning is to instill the idea of formulating a plan and STICKING to it.My choice of MA is the first thing I thought of, It looked right, so I did some tests,and put the results into a spreadsheet.
Trading the dow has a lot going for it for those that are "risk averse". There are no sudden 50% drops overnight to contend with. You can get 20x margin with cfd brokers.You can go long and short, and so on.The idea, to start, was with MINIMAL exposure, so you could do this either as a beginner, or as a background trade for extra income.The effort required in trading this system is 10 minutes every day, to evaluate the next day's position- basically "stick or twist".To start, I plumped for the MINIMUM contract on CMC of 1 CFD. This is a 1$ per point contract.At 20 x marging, you would need approximately £350.00 in your account ( 350x1.5x20 = 10,500). This gives you a loss limit before margin call of a 525 point movement against you.My spreadshhet will show you in the 22 odd months of trading, the BIGGEST loss against me was 257 points !
The BIGGEST gain was $1284 ( or rather points).
So, on to how the system works( and this should hold valid for FTSE etc. but maybe NOT for higher volatility indexes such as NAS and TechMark).
As I said earlier,the whole plan revolves around making a descision about the price( index value) versus the 7 day moving average.If the price is above the MA, you are LONG. If the price is below the MA, you are SHORT.
Every day, you decide wether to stick or twist at the open.If you twist, you close your existing position, and open in the opposite direction.This does lead to inevitable losses if the market moves sideways for any length of time, and you get "whipsawed", potentially getting out of phase for a number of movements. If this happens, you can pull out and wait for a major move before getting back in.
The problem can arise at the turning point where the body of the index "straddles" the 7 day MA. Just when do you "twist"?. Now you have to do some extra TA work to resolve this issue, and this is where the system needs some personal interpretation of RSI, CCI and TCI.
Here are my GUIDELINES for resolving these:-An "indescision".This can occur when the body of the candlestick for the EOD straddles the 7 MA. What to do?
You could play it absolutely to the "cross MA rule" - twist if the close closes above or below the MA, depending if you are long or short.The problem here is whipsaws, and there have been quite a few as you can see from the chart and the spreadsheet.
However, if you want to "anticipate" the next move at a crossing point here is my thinking.
1:Have regard to the value and slope of RSI. If it is above 50, and the last 3 periods are rising,consider the next move to be upwards.
2: If RSI is about 50,and "flat" for the last three periods, consider a downturn.
3: Look at CCI and TCI.What is their trend? Up or down?
I have used a rule of thumb which says "consider a switch if the last two periods of either idicator is going against you".
4:look at longer term trendlines formed by TCI and CCI.Did we make higher highs?Did we make lower lows?Are there non-confirmations anywhere( price up, indcator down?
5:You will never be able to resolve an issue in 1 or 2 periods. It will take 3 periods to resolve uncertainty.Sometimes, at the point of indescision,you will be forced to move in a particular direction by the price.
6:being the "wrong side" could be counteracted by intra-day trading.......
7: If you feel more comfortable with very basic TA, resolve an issue by looking /switching temporarily to 14day MA.OR stick 100% rigidly to the close above or below MA rule.

Some furter information on the spreadsheet.I decided , for fun, to up the stakes as things progressed. Well , you would, wouldn't you? We're all gready!So, what I did was to say that ONCE there was a BANKED gain of $1000, the next bet would be for $2 a point.Then when $2000 was banked, the bet went up to $3 a point and so on.This led to a total gain of $100,000 in 22 months.

So there you have it.I am not advocating this as the way to untold riches.It was an excercise to see if the dow could be traded, simply, and with minimum risk.I think I have shown that it can.I shall be starting to trade this system shortly.At the moment,the dow is at a point of indescision, and to enter a "long" today would be folly. The downturn suggests a reversal, but the rules say GO LONG. It would be madness to start long today,only to have the market turn against you immediately. It is no different to trading a stock- to enter at support or resistance is nothing short of an out and out gamble.I will wait for a definite trend continuation or reversal on the 7 day MA before I enter. In the meantime, I will play intraday.
Attached in the next reply will be the graphs and excel data for you to look at.If you are going to trade this system,I strongly recommend that you do what I did.Get the candlestick charts up of the dow, along with RSI,TCI and CCI and go through the motions , day by day, and decide your stick or twist points for yourself!That way, you will have the added re-assurance that YOU know what YOU are doing, and you are not relying on someone elses half baked, pea brained ideas.
One final thing.I have not looked at doing this using a "line chart". Doing so would remove ALL uncertainty about whether to "stick or twist". Maybe I will do this as a follow up if I get bored one night.
 
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ChartMan

Legendary member
5,580 46
I haven't checked the validity of the data in the spreadsheet and at least one person has pointed out an error ( thanks Stuart). So please procede with caution and treat this as an excercise. I shall update later as I develop this further.
 

payneg01

Member
83 1
Hi Martin
Thanks for your time and trouble, I will have a good old look at your idea. Time allowing.
Good luck
Greg
 

Morris

Well-known member
299 2
Worth watching

I calculate that if the Dow closes at its current level 10853 it will be below the 7 day MA.

I will watch this one carefully.
 
indeed... my macd and trix settings crossed over several days ago on the dow and the ft100 is close to the 7 day ma too.

I suspect that the bulls will have another go at key resistance levels but my multi-period stochastics view now suggests weakness.
 
Technically the dow looks weak to me though today was very low volume.

It all hinges on the outcome tomorrow evening so I guess tomorrow will be quiet again.

Do you post on Hemscott Mo?
 

Morris

Well-known member
299 2
Hemscott

Yes I'm Morris Onions (the monika is a tribute to the Goons by the way).
 

ChartMan

Legendary member
5,580 46
I make tonight's close 5 pts above the 7 day MA. Opening and closing at 10877, showing even more indescision. Waiting for tomorrow's fed cut I guess.
 

Morris

Well-known member
299 2
Tonight

Sorry, I am using closing prices for the MA.

Tonight closed @ 10877.3, 7-day MA 10892.08
 

MX

Member
58 1
Hi Morris

Nice to read your posts why dont you drop into the chat room sometime during the day there is a link on the main page.
I often read your stuff on Hemscott and get the impression sometimes that you are in my study as often you seem to be looking at the same stocks as myself and other guys in the room ie RTK, EGS, BT.a ect.We would appreciate your input and expertise on telecom stocks.

Cheers Jeff (MX)
 

Peter36

Junior member
17 0
Hi Chartman,
There is nothing half-backed or pea-brained about your skilful use of technical indicators.
The proof of the pudding is in the eating and $100,000 in 22 months is a nice lot of pudding.
 
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