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- Published on Sunday, 15 March 2015 02:41
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Welcome to Top-Down Day-Trader!
Saturday, March 14, 2015 – today is known as “pi” day. It's named after the mathematical function pi, 3.14159…, which describes circles and spheres. It doesn't have anything to do with trading, it's just coincidence.
Today we're proud to launch TDDT – Top-Down Day-Trader! We've been developing the system for many months now, based on years of research and study, trading, trial and error, successes, mistakes, distractions and all the rest that life brings. At this website, we’ll be describing the markets, trading systems in general, specifics about our system, as well as reporting on daily activity.
What does “Top-Down” Day-Trader mean? It’s simple: we look at DAILY charts first. This gives us a higher level of understanding for PREVAILING market direction and support / resistance levels. Then we look at intra-day charts AFTER we’ve made initial determinations from DAY charts – hence, “Top-Down” Day-Trading.
The Top-Down approach serves two main purposes - MARKET DIRECTION and BIG WINNERS.
Daily charts give us perspective on MOMENTUM and Support-Resistance levels. Momentum is the essence of the top-down approach. Day-trading can be a very difficult business, if you're focused only on intraday activity. The noise of the market can be a killer to day-trading.
By determining long-term momentum first, top-down day-trader gives us a substantial edge that can drastically reduce losses from the noise of the market.
SLOPING MARKETS – the trend is your friend. This is fundamental to Top-Down Day-Trader. Daily price patterns and momentum in sloping markets make a huge difference in the TDDT approach.
Prevailing Market Direction also helps us with …
We are not shy about it. We're after BIG WINNERS!
Multiple time frames are the secret to getting these big winners. That's what the TDDT approach is all about.
· Daily Charts – we use these to establish prevailing market direction
· Hourly Charts – we use these to establish midterm market direction
· 5-minute Charts – we use these to see what the market is doing at the moment
In sloping markets, we only trade if all three of these time frames are showing movement in the same direction. This is what leads to BIG WINNERS.
If the prevailing momentum (DAILY) is in a certain direction, and the midterm momentum (HOURLY) is also in that direction … that provides a solid directional foundation. When the short-term money (5-MINUTE) is ALSO moving in that direction, the chances of a big winner are substantially higher.
So - what happens if the market isn’t sloping? Very simple. We don't trade it. Instead, we look for other markets that ARE sloping.
OK, a clarification of the above. We might (and I say MIGHT) trade a particular market if the DAILY chart is flat. In that case, we’d look for the Hourly and 5-minute charts to both be sloping in the same direction. But really – why bother? Between futures, Forex and optionable ETFs / stocks, there will ALWAYS be plenty of TDDT candidates on any given day.
The TDDT Method in a Nutshell
The TDDT approach is very detailed, but following is a basic Step-by-Step. If you’re NEW to trading, or new to day-trading – PAPER-TRADE FIRST to get comfortable with the process.
· Put together a portfolio – or several portfolios – of tickers you like to trade. Leveraged instruments are best – Futures, Forex, and “optionable” ETF / stocks. We trade a core portfolio of 25 – 40 tickers.
· Every day before the market opens (or after the close,) scan your portfolio(s) using DAILY charts. Include a short-period MA (moving average) indicator. Flag tickers where the MA LINE IS SLOPING. This should take just a couple minutes. We use an 8-period exponential MA – feel free to experiment. We use Excel, with a column flagging each ticker as UP or DOWN or (X or some other flag for “no direction.”)
· Scrub out just the UP tickers and the DOWN tickers. We don’t care about the “no direction” tickers.
· Now – just before the market open – check HOURLY charts for those UP and DOWN tickers. Flag the ones where HOURLY direction and DAILY direction are the same, whether UP or DOWN.
· Now you’ve got TWO sub-portfolios – one UP (both DAILY and HOURLY) and one DOWN (both DAILY and HOURLY.)
· IMPORTANT NOTE – Hourly chart direction can change at any time during the day. It’s best to check the 2 lists every hour or two during the trading day – e.g. just after hourly bars print – to confirm that each hourly slope still agrees with daily bias. If one changes – DON’T TRADE IT unless the slope changes back into agreement with the daily slope.
· During the trading day, check 5-minute charts for your two lists often (every 10 – 15 minutes, or even every 5.) Set up a system where you can do this quickly and easily. A grid or checkerboard setup is great – you can scan 12 (4x3) or 16 (4x4) or more at a glance, if your brokerage / charting software supports that.) At TDDT we set up 2 grids - one for the UP list and one for the DOWN list.
· You’re looking for 5-minute chart slopes in the SAME DIRECTION as the prevailing Daily / Hourly slopes – when ALL 3 TIME FRAMES ARE IN ALIGNMENT! That’s when you want to enter a trade.
· Note on this next step: it's best to enter soon after the 5 min. chart turns in your pre-determined direction. Most markets are prone to frequent switchbacks, and if you jump in midway along a sloping line it could reverse at any time.
· A slope right after the market open is often a pretty good play. If it opens in the opposite direction or sideways, the first UP switchback of the day can be even better.
· Check your UP portfolio, perhaps every 10 or 15 min., watching for tickers to turn UP. WAIT UNTIL THE MA LINE BEGINS TO SLOPE UP – with at least 1 full bar printed and the MA line sloped in the new direction BEFORE the printed bar.
· Before buying – CONFIRM that all 3 timeframes are in agreement in terms of MA slope!
· Now enter the trade – buy the underlying or buy “call” options. For best results, use a BUY LIMIT order with price near the 5-minute MA line (or use a MARKET order.) If using a BUY Limit order, don’t forget to compensate for the Bid/Ask spread when setting your entry price.
· Do the same with your DOWN portfolio looking for DOWN open / switchbacks on the 5-minute chart. Sell the underlying or buy “put” options to enter.
· EXIT on a 5-minute chart reversal, or use preset stops / limit exits.
Note to new traders: if any of this language is confusing or unfamiliar to you, it's critical that you take time to educate yourself before putting real money into any trades. There are plenty of resources available to learn the basics. We hope you'll bookmark TDDT and come back when you're ready. Trading is a complicated business, and can be very costly if you jump in before being fully informed. Most successful traders have been at it for years. We assume that our readers are at least familiar with the fundamentals of trading.
NOTICE – this is an extremely simplified version of our system. Novice traders should trade these ideas using a paper-trade account only. Risk management, position sizing, detailed entry and exit rules and other factors are essential to trading success. EXPERIENCE is also critical. Novice traders should learn how to trade using “virtual” money in a paper-trading environment.
Here’s what we’re watching going into the Sunday / Monday open:
US Dollar Index (futures)
5-Year Treasury Note (futures)
10-Year Treasury Note (futures)
S&P 500 (futures)
Crude Oil (futures)
Soybean Oil (futures)
EEM (Emerging Markets ETF) – or derivatives such as options
That’s it for now. Thanks for reading – and here’s to your trading success!
Pete Russell and the TDDT Team
Notice: Top-Down Day-Trader does not offer any personal financial advice or advocate the purchase or sale of any security or investment for any specific individual. Articles, newsletters and/or comments are for educational or illustrative purposes only. Readers should be aware that investment markets have inherent risks. Any stated returns may include results from leveraged instruments such as futures, Forex and/or options.
The risk of loss in trading futures, options on futures, Forex, stocks and stock options can be substantial and is not suitable for all investors. Past performance is not necessarily indicative of future results.