Basics of trading the Dow using Support and Resistance

The Daily Cash Dow method performs very well in a trending day but can lead to a number of failed trades in a sideways or choppy market.

The previously presented rules/guides for stake sizing, capital management and stoploss usage should be applied as appropriate.

Trading the Daily Cash Dow (210 Kb)

Method: Trading the Daily Cash Dow using Moving Averages for Entry Trigger

This method can be used in a number of different ways to suit the risk profile of the trader. There is a cautious style, a middle of the road style and a real ‘walks with wolves’ style. My own trading tends to lean to a mix of the first two with an occasional dabble into the third. The merits of each will become clearer with further explanation but you need to be aware of all three as this knowledge will help to identify and anticipate exit points.

Three charts are used as the primary setup for trading using this method:

  • One minute candlestick with 10 period Simple Moving Average and 30 period Exponential Moving Average.
  • Six minute candlestick with 10 period Exponential Moving Average
  • Thirty minute candlestick with 10 period Exponential Moving Average.

Your chart screen for this setup should look similar to the following:

Spread Bet - Trading the Daily Cash Dow using Moving Averages for Entry Trigger

From the above you should be able to see the chart stack with the 1 min chart on top of the 6 min chart which is on top of the 30 min chart. Clearly shown in each is the Moving Average curves which will be used to trade using this method. The exponential moving averages are the white lines.

Trading using the cautious style we will only trade in the direction of the exponential moving averages and only trade when the trend is in the same direction for the 6 min and 30 min charts. So, if both Emoving averages are falling we will only go short, if both Emoving averages are rising we will only trade long.

Slightly less cautious is to trade only using the 6 min Exponential Moving Average (EMA) and disregard the direction of the 30 min EMA. This will give more trades but is more risky as you can be caught by a sideways market or a reversal.

Trading this method is quite simple and uses the following rules -:

  • Trade only in the direction of the 6 min EMA ie. if this is up then look for buys and if down look for sells.
  • If looking for a more cautious approach only trade in the direction of the 6 min EMA and the 30 min EMA and only when both are in agreement.
  • When the 6 min EMA is trending down and the 1 min SMA is below the 1 min EMA then sell.
  • When the 6 min EMA is trending up and the 1 min SMA is above the 1 min EMA then buy.
  • Buy into weakness i.e. Wait for the actual to be moving downwards when buying.
  • Sell into strength i.e. wait for the actual to be moving upwards before selling.
  • When the 1 min SMA is close to the 1 min EMA then this is the idealized trade point as this also gives a good stop loss exit point should they cross.
  • A wide divergence between the 1 min SMA and 1 min EMA is a danger point / exit point.
  • Only trade when the price is in your favour.
  • If an opposite cross of the 1 min SMA and EMA occurs then use this as a stop loss trigger.
  • Consider the strength of any move before closing a position for a stop loss because the Simple Moving Average and Exponential Moving Average have crossed. If the move is strong then close immediately. If it is weak then consider allowing the stop to run for a few points.
  • Do not trade when the 6 min EMA is flat or has little clear direction.

The following 1 min chart illustrates a typical trading session using this method.

Trading Support and Resistance in a sideways market

For the higher risk trader you can consider trading against the trend when there is a large divergence between the 1 min SMA and 1min EMA. This is the ‘walking with wolves’ style referred to earlier. Looking at the above charts you should see that a wide divergence usually signifies a reversal of the short term direction. This should be used as an exit warning or trigger and can be used to enter an opposing trade. Care should be taken if using this point for a reverse trade entry as there is no clear stop (the SMA and EMA are diverged and have already made an opposing cross so cannot be used as a stop loss exit). Usual stop methods should be used.

This method is a good method of getting prices which are biased in your favour. You are selling when the actual is moving up and buying when the actual is moving down. If you only enter trades when the moving averages are close together on the 1 min chart you will also have a clearly defined stop loss point if the cross of the moving averages occurs. You need to keep your eye on the 6 min MA and watch for flat spells or reversals. If you use the wider divergence of the 1 min moving averages to time reversals there is also a strong possibility of getting into a reversal when it first occurs and when the movement is strong. As the safe option of only trading when the moving averages are close to each other gives very good results the use of the wide divergence to get opposite entries should only be used when confidence has been gained used the cautious approach first. Once consistently profitable using the cautious approach then, and then only, consider walking with the wolves.

Patience pays when using this method. Wait until the setup is in your favour and the price is good. Stop loss without hesitation once the negative cross or your stoploss point is reached. Returns on trades vary considerably using this method. As few as a few points to 60 or 70 points. Each trade has to be traded on its own merits and an eye kept on the closing opportunity. Don’t panic if you close too early and the move continues, you will get another opportunity.

Remember to use stake sizing as appropriate when using this method ie. for a close stop you can use a bigger stake and for a far stop you should use a smaller stake. For a wide divergence entry where you are expecting a reversal it would be usual to use a smaller stake.

It is sometimes possible to add to a position with this method. Once you have caught the initial move and if the expected reversals are not large then instead of closing and re-opening leave the original position open and add when you would have opened a new position. If the reversal continues then you have given away some or all of the gains from the first position but if the actual moves in the expected direction you will now have two profitable positions open and will be maximizing the gains from the first position. A good example of this would be at points 7 and 8 in the above chart. Rather than closing at 7 you would add to the position at 8 which would now leave two trades open to run to point 9.

Please note that this guide was written for my own use and for comment by others. It is not intended that any of the ideas presented here be used by anyone other than myself. Should you wish to use any of this material as a basis for your own trading method then you do so at your own risk.

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