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The Danielcode

Interesting Hypothesis or Trading Edge?

Fri, Feb 22, 2008 - 12:14pm

This has been an exciting week for the Danielcode as I worked with a respected US broker to provide the Daniel number sequence from which they will provide trading strategies to make trading the Daniel numbers safer, simpler and more profitable for their clients and mine.

Esoteric trading strategies are beyond the resources of most traders. Some of my clients are part time traders who have real jobs and are looking to learn and start trading either to supplement their income or to lay the base for their retirement or purely as a matter of interest. Others are already masters of the craft and are looking for that edge that distinguishes them from other professional traders. I am dedicated to helping clients from master trader to newcomer profit from the unique disciplines imposed by the amazing accuracy of the Daniel number sequence. For the Danielcode to move from interesting market hypothesis, to mainstream trading methodology it must be capable of being executed by all these groups.

To this end I have been working with the Chicago brokers, StrikerSecurities Inc, www.striker.com to offer a service to identify high probability Daniel trades in forex initially and then to expand that service to other markets. Next week Striker will begin providing expert analysis of the Daniel numbers in specific chart set ups.

I maintain that the exactitude of the Daniel number sequence lends itself to both simple and sophisticated trading strategies. I also maintain that trading the Daniel numbers is a rigorous and transparent discipline. Importantly from a trading perspective we know the crucial Daniel numbers days in advance and we know where the stops go before the trade is placed. With the addition of some simple indicators available in any charting package we can provide the crucial answers that traders need. Every trade in regulated markets boils down to this:

  1. Is this market setup for a high probability entry?
  2. If so is it a buy or a sell?
  3. At what point and how do I enter?
  4. Where do I put my stop loss?
  5. Where do I exit?

And that’s it! The rest is background knowledge and technique but every one way trade (as opposed to a hedge) comes down to these basic questions.

Let me take you by example through some of this week’s Daniel trades ranging from simple entries and exits to some quite sophisticated stuff. For the master traders among you, skip the next few sections. You will find the Advanced Trading strategies later in this article novel and unique. As usual I emphasise this is only one approach. There are many.

In Forex, Sell against resistance; Buy against support

I claim that all market turns are made at a Daniel number. For practical purposes there are limits to the number of Daniel sequences that I can display on a chart so what I provide are the most probable sequences. Trading is about probabilities. There are no absolutes.

Dealing with forex we know that 85% of market turns on the daily timeframe come within 40 ticks (pips) of a Daniel number. Keeping with the simplicity of Daily charts we are looking for a “setup” bar. That is initially any bar that has its high or low within 40 ticks of the nearest Daniel number. In a falling market the low of the bar may be more than or less than the number but it must be within that 40 tick limit. I have set out in previous articles and the Danielcode Online FAQs the parameters for these setup bars. This is the chart that I sent to my broker at 8:18PM US CT Wednesday:

pound

I have identified Wednesday’s bar as a Daniel setup bar and I have identified the placement of the stop at 1.9284. The two stochastics one fast and one slow are standard stochs straight out of the Genesis charting package. Nothing fancy here. Let’s examine this setup bar more closely.

pound dollar

I have added the two dotted lines that represent the extremes for this particular setup. I call this the “Action Zone”. The 40 tick margin is not set in stone, different traders will have different parameters, but this is the most common number. For this to be a valid setup bar we need the low to be inside this zone. Wednesday’s low of 1.9360 complies. For Wednesday’s setup bar, tick this box. As we are looking to buy this entry we need some assurance that the market is ready to recognise the 1.9324 Daniel number by reversing. For this requirement we use normal market indicators. Here I have used a longer term and a shorter term stoch. This tells me that the market in conventional terms is oversold on two different time frames. Use your favourite indicators. They are all much the same. Tick this box also. Price and the stochs are telling us that on this timeframe the Daniel setup bar is a Buy. We have now answered questions (i) and (ii) above and we have what I call a Qualified Setup Bar.

Question (iii) has many possible answers. One way is to buy on the close of the setup bar or the next bar is open. In forex with practically 24 hour trading they are essentially the same thing. This entry method is only applicable to forex for reasons I will show you later. Here we are long this market at the open of Thursday’s bar which is 1.9418 with our stop loss at 1.9284. We know we have a 134 tick stop. Could we have done better? Of course. We could have bought the upper range of the action zone with our stop at the lower range for an 80 point stop or we could go to a smaller time frame to get an earlier entry and use a swing stop but I am showing you a simple step by step process that you can repeat over and over again and you don’t need to be sitting in front of a screen all day and night to execute this process. Further we have ways of equalizing all stops.

I have found the placement of stops to be the most vexing issue in trading. Google “Trading Financial Markets” and you will get 15 million results. Ask for “Stop Loss Placement” and you’re down to 1 million results. It seems that talking about trading is more fun than talking about stops! Yet stops placement is core knowledge for safe and successful trading. With my students I stress that the order doesn’t go on until the stops go on. My stops are always in the market, not in my head. The range of stop placement ideas is vast. I had a famous trader tell me that there are no stops on his entry day. Another that he used a 40 point stop on the S&P on entry. He maintained that successful trading was about big wins and big stops! Perhaps. But not for me.

My solution is not to put my stops around market structures such as swing highs and lows. This is too obvious and lacks guile. These liquidity points are well known to the market. The logical solution is to put your stops at the point where the trade will fail. Remember my earlier comment on probabilities? Here is the answer. If we have an 85% chance of a reversal at a qualified Daniel setup bar, the corollary is that we only have a 15% chance of a successful reversal outside these parameters. On these percentages I want to be out of the trade at the point that the percentages stop working for me. That point in this example is the lower limit of our 40 tick action zone. This means the stop goes at 1.9284 or more properly 1 pip lower. Immediately I hear the chorus of “The stop’s too big”. Not so. As all trades have a theoretically equal chance of being a winner or a loser, we want to equalize our stops so that the risk on each trade is equal. We do this under our money management protocols by adjusting our position size so the risk on entry for each trade is as nearly as practical equal. If, for example 200 ticks represented 1% of our account and our money management plan called for a 2% risk on each trade we would take 2 contracts on this entry. If we had got a more favourable entry that put the risk at 100 ticks, bearing in mind that the stop placement always stays the same we would take twice the number of contracts and so on. In this way the risk on entry is always the same and the market decides the reward or failure.

We have now answered questions (iii) and (iv) with precision. The answer to question (v) is not precise. In truth we have no idea where this thing is going so we use technique to compensate for our lack of foreknowledge. You may think you know where this market is going. If so I want to bet that you are wrong. By using technique we take away the guessing and attendant emotion that bedevils traders. There are unlimited exit techniques. If the trade has moved away you can follow it up with your stops. You can use a moving average or a channel. One of my favourite exits is a method developed by Larry Williams’ programmer whose name now escapes me so with apologies to the gentleman in question, that technique is to exit at the first profitable opening. It sounds simple but it has some quite sophisticated nuances. Try it; you will be surprised. It has the benefit of giving a high success rate. Longer term traders will use differing techniques. In our present example after our entry on Wednesday’s close or Thursday’s open at 1.9418 we had a profitable opening on Friday at 1.9627 so we exited the trade at that open for a profit of 209 points. Super trade? No. Nice trade? Absolutely. Absent a reversal signal at a Daniel number we assume the trend in place continues.

The Danielcode Online currently covers 13 currency pairs as well as a number of other markets. You will see these trades setting up again and again. We had 6 pairs with setup bars for execution on Wednesday and another 4 for Thursday some of which were consecutive setups on the same charts so there is plenty of action and opportunity in forex. For this week’s Daniel setup bars in forex which came in 7 different pairs, all were sent to Striker Securities for independent verification before or in the first hour of trading. Using the same technique I have laid out here, some of the trades were marginal in a difficult week but all were profitably. If you can use methodology to limit the dreaded draw downs you are on your way to success.

Here is another trade that made 98 ticks:

euro aud

And another that had successive setup bars:

usd cad

On a shorter time frame AD sent me greetings from Germany today along with this email:

I have a question ... I saw that you posted GBP JPY h4 code... since I did horrible trades today in GBP today since the news come out I really interested whether your website would have helped me .. Please pass me the chart as soon as possible to consider joining. Greetings from Germany!

Alex is referring to our 4 hour charts. This is what I sent him from the Danielcode Online. I have added the turning extremes in red. You can see the Daniel numbers on the chart. 209.14 was support and this market made its low at 208.74! Close enough? Alex wasn’t aware of this secret Daniel number that the market knew but others did not see. As AO from NZ will tell you later price keeps bouncing off the Daniel numbers. Alex will know these important numbers next time.

pound yen

Other markets

This is the chart of an explanatory memo I prepared for a client trading crude:

crude oil

The bars in the red boxes are “Setup” bar that is they have a high or low within 50 ticks of the Daniel number. The stochs are or have been in the appropriate overbought or oversold position so we know what to expect. This is the same methodology that I have outlined above. Identify the Daniel setup bars then plan your trade. See how this market flips from one Daniel number to the next?

AO of Auckland, New Zealand commented on this characteristic in an email to me today “Over the last two weeks I am close to 800 pips (ticks) up trading the FX crosses off the DC numbers! I use the daily chart numbers and it’s amazing to watch how the price can kept bouncing off one DC number to the next. The other advantage is it has also kept me out of trades I may have entered otherwise, I am still learning how to utilize the DC numbers to my full advantage, it’s a little scary of what the potential for profit is once I have.

Gold traders have again been able to trade Comex Gold with accuracy this week as Gold continues its affinity with the Daniel numbers. If you are trading Gold you need to know these numbers. Future numbers have been removed.

comex gold

Here is the current Daniel chart of US T Bonds. Every Daniel level has been ticked off on the way down. New numbers to be posted as usual every Monday and Thursday will provide the key to next week’s trading.

t bonds

Advanced Trading

For those who have been trying to understand what the S&P has been doing this week the answer is below. As AO has commented it’s amazing to watch how the price can kept bouncing off one DC number to the next. The future DC levels have been removed from the chart but the numbers that S&P traders had to know this week were 1323, 1338 and 1369.7. They are all on the S&P 151 minute chart posted at Danielcode Online. Did you know them? The 1369.7 number first appeared on the Daniel charts on 7 February.

sp 500

And for those who think they have seen everything, here’s a very rare chart that you have never seen before:

sp500 mar 2008

Those wavy lines that look like Bollinger bands are in fact Danielcode binomials. Charts cannot accurately display these price sequences but this is a good approximation. Binomials are created from the same Daniel sequence that you see on all of my charts but instead of being created in the linear aspect they are calculated as fractals of an arc. There are actually 8 opening bars on this chart that opened outside the binomials. 6 gave instant reversal signals and only 2 were continuation signals, 1 of which reversed after lunch. Ever wondered how those big gap open days are going to trade? The binomials tell you with a high degree of probability. Markets have great difficulty overcoming the Daniel binomials. Other bars that open close to the binomials quickly reverse.

From the binomials we knew to sell Tuesday’s open and buy Wednesday’s open. Did you? You can see the opening bars way outside their binomials. This was an invitation! Thursday’s high came at a conjunction of a linear Daniel number and the Daniel binomial. Talk about a double helping. All of these numbers are created well before the market opens, sometimes days and weeks in advance. You know the numbers and others don’t. That is your trading edge. The more you study this chart the more you will see. The binomials are not available at the Danielcode Online but I thought you would enjoy seeing what a wonderful setup to plunder they are.

Look at the binomial action around the January low. On 22 January the gap open outside the binomials was a signal to buy and gave us 41 points. The next day the big boys did it again giving us almost 70 points then took the open above the binomials on the 25th. That was an open advertisement to sell. This week hasn’t been as dramatic but the signals on the open have been equally clear and rewarding for Online and private clients alike.

Copyright © 2008 John Needham

About the Author

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