Flexing muscles

Before I plunge in DAX, I have decided to trade two weeks on demo, to get back to grove, to settle in new environment (we have moved for the winter to Santa Cruz de Tenerife), organize my trading desk using my large notebook (17" Envy) and get finally a decent internet connecting while having 3G as a backup. I am using a VPS from speedytradingservers, CQG datafeed, Ninja trader 7.

Today I want to show good, bad and evil in trading DAX in European session. DAX is a very volatile instrument printing daily ranges from 100 to 500 ticks. Average is perhaps 200-300. It is probably the most volatile instrument from any liquid instruments available. However, it is also very technical, and tends to follow the money. It has very good levels, and my take in trading DAX is to establish a sentiment and momentum, market type, plot levels and trade rejections from 3 minute chart. In a picture above you can see a typical day in DAX. Entry is with a very short stop of 7.5 points (15 ticks) and target was taken at 30 points profit. 4:1 reward to risk. This is what I look in DAX.

Another example. Previous day market consolidated, volume profile is very compressed. As cash opened at 9 AM at Frankfurt, we broke up from the range but then pulled back to revising a key level, that formed range top for the later part of previous US session. I entered at second test, trade had zero drawdown and quickly brought 30 points.

A trending day in DAX. I have marked all good areas to enter short and/or add to position. You can make big money on days like that by holding and adding to position. It's always hard to know when it happens, but nothing is easy in trading. These days come often enough in DAX. Just have good reward to risk and re-enter or add to position when good signal occurs. If you can do that, one day like that can make whole month's profit easily. This is how DAX has to be traded and this is where it at its best.

 Another example of reversal/wide range day. This is most difficult one to trade. But again, work with levels and don't call tops and bottoms. Look for momentum and direction established and trade reversals of pullback at previously drawn levels. You may lose some and some will go to break even but one or two will win big.

At last, let's review a full session trading in DAX. I have marked trades that should have been taken here. This is a range day, a very narrow one for DAX. You never know when it happens but it is safe to assume every day as a range day unless proven otherwise. Expect a range play and be positioned for a break out with a good cushion of profit.

The market has opened with a gap down. There were attempts to close the gap at pre-market, but highs were sold aggressively.

Entry 1 - we see another attempt to close the gap, previous level and highs sold off again. Entering on the wicks of 3 minute candles. Target is 30 point, risk is 7.5 points. Target would be achieved.

Entry 2 - break of the range down and pull back up. The road down is open, there is a possible short position building. Or a test down, you never know for sure. Entering short at the previous level again. This trade made enough profit to move to break even (10-15 points is enough). Price would come back to entry and stop us at entry.

Entry 3 - we can see a break of the range up and two legs up with HH. Entry at the pullback to old level on the candle tail. Same risk and target. Profit 30 points.

Entry 4 - continuation of the move up, pullback to the level, entry at tail. This trade made 20 points. This is a judgmental call - take the profit at this level where price sold off big, or leave it at break even. I consider it as a break even.

Entry 5 - fresh level, not very clear, won't be traded if we are still in the long from entry 4. Otherwise entry short is possible. It would make 30 points.

Entry 6 - break down of the range, one pull back, new low, another pullback to the level. Entering at level short. Quick loss of 7.5 points.

Entry 7 - already existing local level (intra-day). It would have made 30 points but would be in progress during ADP Employment news.

Now is time to show the real trades (demo).

First trade - tried to get long on the small pullback. I saw a loss of momentum and closed in a small profit.

Second trade - happened at point 5 by the previous analysis. Good entry but I closed it too early, too much obsession over small time frame consolidation and reaction.

Third trade - tried to buy a low of the range. If I would be in a previous trade I would not be trying to do that. A loss.

Fourth trade. Sold a pullback to the level, it went well but was unable to break the lower level and pulled back taking me out for just 2 points profit.

Fifth trade. As it took me out I re-entered again on a weak signal. This is a mistake, re-entries unless happen after a good move usually lead to losses. So it happened.

Sixth trade. Tried to reverse and buy the level. A foolish trade and should never be done. Ever. A loss.

Seventh trade. Sold the level with market order, as tried to hop on the train. A stupid trade. And a loss.

Eighth trade. Sold a new level which was already confirmed. A good trade and would have made 30 points profit unless I closed it at 15 points profit. However ADP news were coming in 15 minutes and it was a right call.



Few conclusions and rules to trade:
1. Wait for a borders of range to form, we need few highs or lows to mark the level
2. Look for coincidence with a levels of the previous day
3. Break out from the range does not mean I should try to enter on the first pullback to the previous range border. It means if price comes back to the range, I should look to to enter at the level inside or at the opposite range border only.
4. If I assume trend is starting and we get a pair of legs outside of the range, then I can enter at the border of the broken range
5. I should only trade inside the range if price broke down from the range and came back inside. Otherwise I should trade only range borders.