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View Full Version : Dissect my CFD index trading system



AMR
18-11-2007, 01:35 PM
I have been trying to daytrade the Hang Seng CFD index lately, and have only broke even thus far due to poor money management and a bad habit of trying to pre-empt signals even thought I am in the right direction of the trade almost every time so far. I am in the process of developing a semi-mechanical system/rules to try and remove the emotional and subjective elements of trading.

Rules :

Go long : When the 7 minute EMA crosses above the 14 minute EMA, and both are above the 21 minute EMA. (Vice versa for going short)

Close long : When 7 minute EMA falls below the 14 minute EMA. (Vice versa for going long)

I am also taking information from a 10 min RSI oscillator - a crossing over the 50 line will be a "pre-signal" to go long, and vice versa.

Stop management : Maximum loss is 60 points ($100). Move stop loss to breakeven after the trade moves into profit by an amount (subjectively). Trail stops to retain 40% of profits. I will be using "mental" stops.

Whipsaws : If whipsawed by EMA crossovers, stay out of the market and analyse the latest trend as a rectangle chart pattern. Go long/Short on the breakout. Whipsaws by the 10 min RSI signal the trend is weakening.

A few things I am unsure of :

1. RSI divergences - are they accurate enough? I am not too keen on using divergences at present as it is very costly to be thrown out of a trend early.

2. Candlesticks : Does a 1 min candlestick contain enough "timeframe" to be significant?

All feedback appreciated. Thanks.

rockcold
19-11-2007, 09:13 AM
Hi there,

Day trading is a pretty tough business at the best of times. As far as your method goes i would say you're on the right track however don't get drawn into trying to develop a 'mechanical system' that is too advanced. The markets are not mechanical and you will spend too much time developing your system and not enough time just getting a feel for the market you trade.

I have been day trading the AUSSIE200, GER30 & UK100 for a while now and am only now starting to see some results.

A brief outline of my 'system';

#1: Good money management - know your worst case loss should your trade not work out and never risk more than 2% of your account on each trade. This is a hard rule to follow, especially if you are used to trading much larger amounts - it was for me - but you must stick to this rule if you are to be a long term player. I expect to move my limit up to 5% once i have had some long term success, but the point is to stick to your limit.

#2: Your method of using - i'm guessing a 1 min candle stick chart - is very limited in knowing the trend of the day. As you have said you have been stopped out a number of times only for the trend to continue in the direction you had initially expected.

Try using the triple screen approach (cheers alexander elder). I personally use a 75 min candlestick chart with a trend following indicator - MACD-Histogram & 12EMA & 26EMA on price. This is my 'long-term' view of the market and it's direction. I always trade in the direction of the MACD line. EG if the slope of the line is down - I can only SELL, if slope is up i can only BUY.

Next i use a 15min candlestick chart, again with the MACD & EMA's and also a Stochastic to show overbrought and oversold levels. This is my 'trading time-frame'.

Finally i use a 5min candlestick chart which i use find my entry/exit points.

This is a very brief run down of how i trade and is by no means the only way to do it but has shown some success for me after alot of trial and error.

Finally your STOP management - don't use mental stops - they don't work. You should know where you stop is to be placed as soon as you place your trade. Work out where your recent support/resistance is and have your stop planned while you have no money on the line. Place it as soon as you have entered your trade. This is critical as your emotions will take over once your money is on the line and your judgement is impaired.

Work out your key numbers - open, close, previous high/low and significant support/resistance levels before hand and place your stops around these levels.

Also, never hold a trade overnight, especially with the Hand Seng as it is prone to gapping large amounts from one day to the next.

This, as i said, is not the only way and is essentially my system based heavily on the Alexander Elder methods. If you are serious about day trading i suggest you read his books - Trading for a Living, and Come into my Trading Room. Another excellent read are Tom Busbys books on day trading. Have a search around on Amazon for these.

Hope you get some useful info out of this and best of luck with your trading.

AMR
19-11-2007, 06:06 PM
I've read Alexander Elder's books and triple screen is a great concept. The main difficulty I have in using it in the past is determining the time frame to consider, i.e The HK33 is either in an uptrend for the last few years, or a downtrend for the past couple of months. I will try your intra-day approach and see how it goes.

I always close out by the end of the day in this kind of ranging, unpredictable market since I want to avoid the huge 400-600 point gaps in the wrong direction, but this article has an interesting perspective.

http://tremblinghandtrader.typepad.com/trembling_hand_trader/2007/07/spi.html

All in all, thanks for your help and expertise!

AMR
29-01-2008, 01:38 PM
I thought I'd follow this up today before my second foray back into stock market indices.

The first system I designed works very well in strongly trending markets - markets with small retracements, no volatility, etc. It whipsawed the crap out of my account balance in moderately trending markets and volatile trending markets with wide trend channels. In short, it's quite inflexible.

I'm moving away from mechanical indicator "holy grail" systems and back to a more discretionary trading approach based on charting patterns, support and resistance, and candlesticks.

Steve
01-02-2008, 02:59 PM
I don't like to use 1min candles as they are very volatile. The smallest candle I generally use is the 5min as this is not as 'demanding' as using a 1min...

AMR
01-02-2008, 03:00 PM
I don't like to use 1min candles as they are very volatile. The smallest candle I generally use is the 5min as this is not as 'demanding' as using a 1min...

Won't that need a much bigger stop loss though?

Steve
01-02-2008, 04:53 PM
Won't that need a much bigger stop loss though?

It shouldn't affect your stop loss, as this is pre-determined before you enter the trade...

AMR
01-02-2008, 05:09 PM
Sorry, what I meant was it would be wider in terms of pips, resulting in a smaller position size. I'm still trying to get a feel for stop placement and especially trailing stop management which is also my exit strategy.