Trading the Daily Cash Dow – a simple Mechanical Method
It is recommended that you have read and understood the previous trading methods before reading this document.
The following method is a mechanical trading method. What this means is that when certain entry criteria are met a trade is always opened and when the exit criteria are met it is closed. This is not an automatic system. An automatic system would place the trades for you, a mechanical system requires that you monitor the entry values and enter the trade manually.
The previously presented rules/guides for stake sizing, capital management and stoploss usage should be applied as appropriate.
The purpose of this mechanical system is to give you:
- a clearly stated and consistent entry point
- a clearly stated and consistent exit point or points
- a planned stoploss figure
- a planned stake size
Method: Trading at fixed points
This method will typically give you 2 or more trades a week and should only be traded after the US lunchtime. It is very simple and basically uses the principle that if the Dow has moved a reasonable percentage above or below the previous close level then it is likely to continue this move. I use 0.35 percent of the previous close as my triggers for trade entry for this method.
Take the previous close figure and multiply it by 0.35 percent to give the trigger factor.
Previous Close x 0.35 / 100 = TF.
Subtract TF from the previous close value to give you the sell trigger level.
Add TF to the previous close value to give you the buy trigger level.
Example.
Previous Close = 10 000.
Trigger Factor = 10 000 x 0.35/100 = 35.
Buy Trigger = 10 035.
Sell Trigger = 9 965.
Open the trade when the actual passes through the trigger point. Do not try to anticipate this cross. Wait until it is actually passing through. If you have missed the entry point ie. the actual has already passed through the trigger before 12.30 EST then do not use this entry method.
If you are tempted to trade using this method in the morning then do not trade any move through the trigger levels in the first 20 to 30 minutes of the open. Large swings can occur at the open which will generate false triggers and the SB company price will probably be biased heavily against you.
Set a stop loss which is consistent with your usual stop loss methods but remember that you are looking for larger moves here and do not want to be stopped out by normal market noise. A stop loss of 20 to 25 points seems to work reasonably well for the Dow using this method. You can of course use larger stops if you balance this with a smaller stake. An obvious stop point is the previous close level if you wish to use a larger stop.
Backtesting of this method shows that the optimum targets are 73 points for a buy and 79 points for a sell. I am currently forward testing this method and it is probable that these values will be modified as better data which takes into account entry and exit slippage becomes available.
You should consider closing a part of the trade when 20 to 30 points in gain and a further part when 45 to 60 points in gain. Try to leave the balance of the trade running as long as possible to maximise any gains but close on any reversals which go to your previous close levels.
This method has a major drawback in that it is possible for a trade to be triggered, the stop to be triggered, a trade to be triggered, the stop to be triggered etc. This whipsaw action can happen a number of times in a single day. The advantage of only trading after 12.30 EST using this method is that you will reduce the occurence of these whips but offsetting this you will also have fewer trade entries. If you think you are likely to get a reverse then don’t enter the trade.
All things being equal the trade, or the balance of the trade if you have taken part profits whilst it has been running, should run to the end of the trading day.
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