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S&P stands for Simple and Profitable!

Sat, Feb 2, 2008 - 12:20pm

At the Danielcode we seem to have attracted a large number of hugely enthusiastic traders from Financial Sense readers, many with the same problem; the lack of a simple trading plan. The number of people who ask me "How do I trade the Danielcode" which on more discussion turns out to really mean "How do I trade" is evidence of the growth of interest in trading markets. These people read a great deal of financial material, typically visit 3 or 4 financial commentary web sites or blogs daily and have a real interest in financial matters, but they don't have any idea how to trade. The hardest thing to find is a simple solution for these enthusiasts. I have spent some time researching available "learn to trade" sites and much of the material does appear complex. By the time you get to lesson 12 the brain has exploded! Potentially this is a problem for the industry because we are losing keen, motivated market participants at an alarming rate. Brokers will tell you that the wipeout rate for new traders is huge. I now understand why.

Having asserted that the Danielcode was not designed as a trading system of any kind, short term or otherwise, I acknowledge that there are inherent problems in selling a car to someone who can't drive! The enjoyment and benefit comes from the fusion of object and function. Equally my standard answer of "I have been looking at trading screens for 20 years; you will learn by doing", has in hindsight been a cop out. These guys are not going to last 20 days let alone 20 years unless they get on the right track! Many are part time traders who can't devote huge resources to research and learning to trade. I want to help and encourage new traders to learn to trade simply and profitably.

The most obvious fault is a failure to have a clear trading plan. The lack of a simple and precise plan leads traders down the dreaded "What will it do today" path. We never know the future but a sound methodical approach will give you the benefits you seek. The basic building blocks of all trading are entries and exits; risk and money management. How I advise those who truly want to learn is the essence of simplicity. This then is your trading plan. It is simple, and deadly!!

Price

Our primary concern in all things trading is price. Price is real and it is your reward or your punishment. Price makes indicators work. Price moves first; indicators follow. Our aim is to buy low and sell high. These are relative terms. I am not concerned with possible patterns of which there are too many alternatives to offer me clarity, nor am I concerned overmuch with what the market may do tomorrow. I don't know these things but the market will give me clues as to the longer term probabilities. What these probabilities are is a subject for another day.

Setups

A setup is a precondition that alerts us that a high probability trade is imminent. This setup means having the market acknowledge the Daniel number sequence. Acknowledgements occurs when a high, low or close of a bar on whatever time frame you are operating in, finishes its sequence with one of these features in close proximity to the nearest Daniel number. "Close" means within 40 pips in forex or within 3 points in S&P and Gold and 30 points in DJ. Setup bars can occur on either the index (cash) or the futures. Either setup is valid and both have equal weight. The degree of closeness to the DC target is not set in stone, but that's how close I want "recognition" to be.

Let's see this in practice from Thursday's trading. The nearest Daniel numbers issued to our clients were 1335.16 on the downside and 1382.80 on the upside. Client's charts usually have the three nearest DC numbers above and below the market on them. In fairness to my subscribers (who pay the nominal sum of $49 per month for the Daniel charts of 16 forex crosses with weekly and daily charts, 5 CME futures contracts, 6 forex 4 hour charts and a mix of daily and weekly charts for Gold, S&P, Dow Jones and T Bonds both indices and futures, updated during the week to produce about 85 charts per week), I have only left the nearest DC numbers on these charts. As the charts have to cover both upward and downward movement we will have some in blue signaling target extensions and some in red being target retracements. They all have the same significance. The different colors are just chart methodology.

The chart below is the S&P index SPX with its nearest DC numbers. These numbers were available to subscribers on Wednesday night so they could be prepared for Thursday's trading. It doesn't concern us how many lines are on the chart. We are concerned only with the DC number closest to the market. We focus on whether we see a setup for a reversal and if not we assume the prior trend continues.

sp500 daily

The futures opened down 12 points at 1335, and within the first 15 minutes of trading the index was at its first downside DC target. We now go to a shorter time frame and to keep things simple I will use the 15 minute chart below:

sp500 15 minute bar

The opening bar in the red box completed with its low at 1334.08 just 1.08 points from its DC number. Obviously this qualifies handily as our setup bar. The simplest "failure" from a known high probability target is to buy/sell the high/low of the setup bar. There are more sophisticated entries but we are just trying to get the building blocks in place and keep it very basic here. We can now add a fast oscillator or stochastic to the mix. Many traders feel bare without this crutch and if used properly it adds a degree of comfort. Let's do that now. I have added a very fast stochastic straight out of the Genesis indicators. Nothing fancy here and we have moved our attention to the little inside bar in red which is now in the red box. We haven't been pulled into the trade by the high of a setup bar being taken out so the red bar now becomes the new setup bar.

spx 15 min

Notice the low of the new setup bar. It is 1335.16. Our DC number is 1335.16! This market is tracking the DC number to the tick. From the chart below we see that the stoch is in the oversold area. Actually it has crossed over but we are not concerned with that. All we require is that it is in the oversold zone. Price beats indicators but with the stoch in the oversold position we are reassured that a rally of some type is likely. Our reversal entry signal now moves down to a few ticks above the red bar. We already have a reversal on smaller time frames but I want the market to prove it to me by pulling me into the trade.

The market duly obliges and we are long this market with the reversal right at our DC number all tucked up. Our stop loss goes under the setup bar by 1 point or so and as we knew the size of the risk before we placed the order we adjusted the size of our position to keep within our risk parameters and comply with our money management plan.

sp500 15 min bar

We now turn our attention to managing the trade. We put on the upside target of the nearest DC number and it is at 1382.80 on the next chart.

1382.80

How you manage your trade from here will vary enormously between individuals, but at some stage I want to move my stop loss to break even. Once my stop is at break even I am happy to try for at least the first DC number. If the market doesn't react at that number, then I repeat the process at the next Daniel level. If it is not going to react we won't get a qualifying setup bar.

By the time the market gets to the upper DC target the stoch is in the overbought position and the 15:45 bar has completed with its high at 1384.32 now 1.52 points past the DC number. The high of the 15:45 bar is within our 3 point tolerance so that's a sell setup bar folks. If you do nothing else your stop is now a few ticks below that bar. At that time of day you would be wise to be out at the DC target and bank almost 40 points between our entry and our exit.

sp500 15 min bar technique

You could have got in earlier with any number of techniques including using a smaller time frame but the shorter the time frame the more false signals you get. This is just a matter of your trading philosophy and skill. Once you have the basics it is all about technique.

Notice that in this trade we didn't have a VIEW about the market at any time. It was all mechanical. The worst words in the trading language are "I think it will............" That's the one thing you can be sure it won't do.

Au contraire, we asked the market to show us a number of things:

  1. We needed the market to tell us it was tracking our Daniel number sequence. We want this demonstrated in a relatively exact way. There are all sorts of different Daniel sequences and I am providing you only with the highest probability selections, but we are not in the guessing business, we want the market to show us that it is tracking the same sequence we are looking at. That is why we need a degree of precision. More precision means higher probabilities.
  2. We used a standard indicator just to show that we were in an oversold position and increase our degree of comfort in taking the buy trade. After you have been at this business long enough you probably won't look at indicators as price becomes all, but it does no harm if you use it the way I have indicated.
  3. Finally we demanded enough price action to pull us into the trade, so again we are not guessing; we want the market to show its hand.
  4. Optimally our target is the next DC number but if you locked in profits anywhere, that is acceptable. Near a Daniel number is better.

This was a momentum entry much despised by professionals who if they had sufficient confidence in the DC number would buy it on limit with a small stop or use very quick bars to see the reversal much earlier. You will too as your technique improves.

We got an almost identical trade on the Dow. Here are the closest Daniel numbers below and above the previous close from the Daniel 151 minute chart also posted on Wednesday night.

wednesday night djia

As you are old hands at this now I have put everything you need to know on the 15 minute chart below. The first 15 minute bar made its low at 12250. That was 30 points through our DC number so it was our first setup bar. The next red inside bar made its low at 12278.95 that's a variance of 1.79 points from the Daniel level! Our confidence is now high. This bar becomes our new setup bar and with the fast stoch in the oversold position we are pulled into the trade at 12361 plus a few points. We have exactly the same setup at the upper DC target where we say thank you 300 points later and close the trade. Note that at the 12445 intermediate target the stoch was not in the overbought zone. In fact there are other reasons why the intermediate target was not a high probability, but you can see that we didn't get a qualifying setup bar with a reversal at that level.

reversal

Because I provide the Daniel numbers for 25 separate markets you don't have to fret about a particular trade setting up. You can afford to wait until all your ducks are lined up. There are many other entry and exit methods which I will write about if there is sufficient demand. Let Financial Sense and jneedham[at]xtra[dot]co[dot]nz (me) know if you want to learn more about trading techniques with the Danielcode.

What I have shown you today is a simple momentum entry but combining the various demands we made on the market increased already high probabilities of buying near the low and selling near the high.

These entries require the fulfillment of a number of preconditions. They produce a high proportion of winning trades. You can verify this by reading the trading reports at my website. When you have mastered this method, we can move on to more exotic techniques.

I have a close friend in Sydney who spent $30,000 or more in trading courses and seminars 15 years ago. For 15 years he stubbornly clung to what he thought he knew and never had a profitable year. As a highly paid medical specialist he could afford this indulgence but his self esteem as a trader was destroyed. Eventually he asked my advice and I showed him exactly what I am showing you. He is now a consistently profitable trader.

Trading is a passion and much more enjoyable when profitable! You can be a profitable trader. This is what DC traders have said recently:

It was a wild night and a brilliant call in the S&P. DL. Kingsford, Sydney
Your GBP/USD hit the DC number 1.9336 RIGHT ON THE MARK AND TURNED COMPLETELY AROUND!
That puppy HIT RIGHT ON THE DC NUMBER Mr. Needham! RIGHT ON THE NUMBER!
After analyzing your GBP/USD four hour chart along with the EUR/USD chart, there is NO DOUBT IN MY MIND that these numbers are like a magnet to these markets! MT, IL, USA
I am one of your new guys and I am learning how this works pretty quickly. Thanks for your efforts and consistency with dedication to post this information. This helps tremendously. I am really enjoying these Daniel code levels. They are really good. DS, USA
I used the DC numbers for audusd and eurusd trades last night and sat back and watched them turn very nicely! AO, Auckland, NZ

The Danielcode is a market definer of mass markets. Forex, S&P, Gold and T Bonds. You can have them all.

I invite you to visit the Danielcode Online to see many more examples of this technique at work.

Copyright © 2008 John Needham

About the Author

Lawyer and Financial Consultant
jneedham [at] thedanielcode [dot] com ()