This trading strategy is based on Dow Theory + Chan Theory + MACD, using Dow Theory to judge market direction, Chan Theory to find buy and sell points, and MACD indicators to refine entry positions. The core of this trading strategy is to utilize the inertia of trends, follow the big trend against the small trend to improve win rates, and utilize small-level stop-losses to capture large-level market movements, thus improving the risk-reward ratio.
The following are the specific contents of the trading strategy, which may not necessarily be completely applicable to you, but I hope it can inspire you.
Step One: Determine the Trading Market.
I mainly trade domestic futures and occasionally stocks. The following content is specifically for the futures market; trading stocks is also definitely effective, but some parameters need to be optimized based on the variety, the principle is the same.
Step Two: Determine Trading Variety.
I only trade these three varieties: rebar, methanol, and fuel oil. Because these three varieties have large trading volumes, are actively traded, and are relatively stable. Choosing trading varieties is greatly related to your own personality and capital size. If you are a bit impatient, you are not suitable for trading varieties with low volatility like soybean meal and corn; if you are a bit timid, then you shouldn’t trade varieties like nickel. Beginners are advised to only trade rebar and methanol at the beginning.
Step Three: Determine Trading Level
The level is very important for trading! The same market situation viewed from different level perspectives can lead to completely opposite conclusions. For example, at the 4-hour level, it may be a point to go short, but switching to the 30-minute level can lead to the conclusion to go long, which is very normal. Therefore, determining the trading level is crucial. Similarly, how to choose the appropriate trading level is greatly related to your own personality, capital size, and the variety being traded.
If you are a bit impatient and you operate at the daily level, where one K-line takes a day to form, you definitely can’t stand it;
If you have 100 million in funds, I definitely wouldn’t suggest you operate at the 5-minute level;
For varieties like corn, which have relatively low volatility, using the 5-minute level is clearly inappropriate.
Therefore, you must dynamically choose the cycle based on your own personality, capital size, and trading varieties. For me, I trade one position every 30 minutes, and one segment every 5 minutes. Here, I borrow the concept of levels from the theory of Chan, which I find quite useful. As for the specific concepts of segments and lines, you can read the original text of the theory of Chan.
Step Four: Determine Trading Position
It is recommended that each trade's stop-loss amount be 2% of the position. Why set this amount varies from person to person; you can set it at 3%, 5%, etc., but a single stop-loss should not exceed 5% of the position.
Number of hands per order = position*2%/stop-loss point/trading unit
For example, if you have a position of 300,000, and the current stop-loss point is set at 30 points, with the trading variety being rebar, then the number of hands per order = 300000*2%/30/10=20, which means you can place a maximum of 20 hands at once. How to set the stop-loss point specifically will be explained in the following entry rules.
Step Five: Determine Trend Direction
In the futures market, there are both long and short directions, so before entering the market, you must determine whether to go long or short. I use the definition of trend from Dow Theory.
Upward trend: High points continuously rise, low points also continuously rise, only long.
Downward trend: High points continuously lower, low points also continuously lower, only short.
Ranging trend: High points continuously lower, low points continuously higher, observe and do not trade until it develops into an upward or downward trend.
Step Six: Entry Mode
After determining the trend in the previous step, we can formulate a specific entry plan, taking the upward trend as an example.
If there is an upward trend on the 30-minute level, then I need to wait for a pullback on the 30-minute chart, and this pullback must not break the previous low, otherwise, it will evolve into a ranging trend. At this point, we can switch to the 5-minute level to judge whether there is divergence on the 5-minute level based on the MACD yellow and white lines, thus determining the end of the 30-minute pullback. Enter long when a bullish divergence appears on the 5-minute level, and place the stop-loss slightly below the current fractal. Note: Each trade must set a stop-loss, and upon reaching the stop-loss position, you must close your position unconditionally, without any luck mentality, otherwise, the market will teach you a lesson.
Taking the recent rebar as an example, the 30-minute chart shows a clear upward trend, and now there is a pullback. I want to enter long, so I switch to the 5-minute level, waiting for a MACD bullish divergence to occur, and then enter a long position after a bullish crossover appears, placing the stop-loss slightly below the current fractal bottom. The stop-loss is 20 points, and the maximum profit is 130 points, resulting in a risk-reward ratio of over 6:1.
Step Seven: Protection
When the risk-reward ratio reaches 1:1, move the stop-loss position to the cost position; this is a personal habit. I like to do this as it gives me a great sense of security, and I will not open new positions until the previous trade has not reached protection. Once protection is reached, I consider that trade as successful.
Step Eight: Reduce Position
1. Reach the resistance position, appear double bearish candles or long upper shadow, reduce the position by half.
2. Break the 10-period moving average, reduce the position by half.
The above is for the 5-minute level, conditions 1 and 2 only reduce positions once, the other condition is ignored.
Step Nine: Move Stop-Loss Up
After reducing the position, if new highs continue to be made, then move the stop-loss position to a previous significant low point, which is also for the 5-minute level.
Step Ten: Exit the market
1. Price breaks the stop-loss position, exit the market.
2. Before the market closes, if the account is in a loss state, exit manually.
The above strategies can be directly used by most people. There was originally a strategy for averaging down and adding to positions, but I won’t include it as it might mislead beginners. If you can consistently implement the above trading strategies, achieving stable small profits should be no problem. If you want to pursue huge profits, you will need to carefully study the averaging down and adding to position strategies.
However, as I said, the decisive factor in trading is still people, the same trading strategy can yield vastly different results in the hands of different people; some may make huge profits while others may face liquidation, which is very normal.
The ultimate purpose of trading is to study human nature.