TLDR;
This video features Rajan Dhall, founder of DND Capital, explaining a simple yet effective trading strategy based on market auction principles. The strategy focuses on understanding price action through daily candles, moving averages, and auction areas to identify high-probability trading opportunities. Dhall emphasizes the importance of aligning daily and five-minute charts, trading with the trend, and managing risk effectively.
- Focus on market auction principles for trading decisions.
- Align daily and five-minute charts to identify trading opportunities.
- Manage risk with a consistent approach and positive expectancy.
Introduction [0:00]
Rajan Dhall from DND Capital returns to Chart Fanatics to share a trading strategy so simple that a child could use it. This strategy, requested by many after a previous podcast episode, focuses on market auction dynamics and price action. Dhall aims to explain the ethos behind the strategy and how it can be visually understood before applying it to charts.
Understanding Market Auctions and Daily Candles [1:04]
Dhall explains that his strategy evolved from his time teaching at the London School of Economics, where he studied market profile. He views the market as a continuous auction, similar to a car or house auction, where prices are bid up and down. The daily candle provides essential information, with the opening and closing prices being key data points. Dhall uses this information, combined with the previous day's auction and current price action, to make trading decisions. He emphasizes that rejecting highs or lows is significant and relates market dynamics to supply and demand principles.
Daily Sentiment and Trading the First Hour [4:52]
Dhall typically looks for longs if the previous day was long, aligning with the auction's flow. He considers the bigger picture but focuses on yesterday's price action. After a significant sell-off, he examines European markets and economic data to gauge market sentiment. The first clue is the previous day's bearish auction, and he monitors pre-market data to assess the market's feel before the open. Dhall primarily trades during the first hour of the US market open.
Simplifying the Strategy: Moving Averages and Price Action [7:39]
Dhall uses moving averages (50 and 21 periods) to smooth out the trend on his daily and five-minute charts. He only shorts when the price is below the moving averages on both time frames. The daily chart provides the bigger picture, while the five-minute chart is where he executes trades. Dhall avoids intermediate time frames to focus on the market's close and open, filtering out unnecessary sentiment.
Auction Areas and Candle Patterns [10:40]
Dhall identifies auction areas as zones of congestion where the price has stopped and tested before moving down. He looks for bearish candle patterns in these areas to confirm short trades. The daily and five-minute charts should mimic each other, showing similar 45-degree angles in the trend. He uses bearish candle patterns like shooting stars or bearish engulfing candles to enter trades, focusing on what the pattern represents rather than the specific terminology.
Candle Matrix and Stop Loss Placement [13:51]
Dhall uses a "candle matrix," piecing together smaller time frame charts to understand larger time frames. He looks for simple patterns, such as a down candle breaking the low of an up candle, as a signal. Stop losses are placed around the candle structure high, and he aims for a two-to-one positive expectancy on every trade.
Value Areas and Market Profile [15:12]
Dhall explains that he looks for bearish candle patterns in the value area or area of congestion. The auction area is where the market is most congested, representing the average price interaction. He uses market profile to identify the value area, where the price spends the most time. This area becomes a magnet, creating support and resistance levels. Dhall stacks the odds in his favor by trading in the direction of the trend above or below these levels.
Scalping and Market Access [18:35]
Dhall considers his trading style a form of scalping, holding trades for about 4-9 minutes. He emphasizes that scalping effectively requires direct market access and low commissions, which are not typically available to retail traders. Without these advantages, overcoming spreads and commissions makes scalping unprofitable.
Fair Value and Market Psychology [22:03]
Dhall defines fair value as an area where the market and producers agree on a price that allows for sufficient sales and production. He stresses the importance of composure, money management, and limiting trades. If the market doesn't feel right, he is willing to refrain from trading. Dhall notes that unexpected news can disrupt planned trades, requiring him to step aside if the synergy between time frames is lost.
Strategy Simplicity and Trading Mindset [28:10]
Dhall reiterates that the strategy is simple because it focuses on the auction and price action, avoiding overcomplication with numerous indicators. He advises trading on the right side of the "V" pattern, aligning with the daily time frame. Dhall maintains a consistent risk level and relies on statistics rather than intuition. He acknowledges that some traders can compound risk more effectively but prefers a simpler approach.
Trade Management and Community Insights [35:42]
Dhall describes his trade management approach, focusing on scenarios after a bearish candle and gap down. He identifies key resistance levels and potential short setups. He notes that the market can move quickly, requiring fast decision-making. Dhall discusses the debate around moving stops to break even, noting that it may not be viable during volatile periods. He emphasizes the importance of systematic trading and tracking statistics.
Moving Averages and Time Frame Alignment [43:20]
Dhall stresses the importance of aligning moving averages with time frames. He uses slower moving averages for macro trades and faster ones for day trading. The goal is to ensure the edge is in his favor on both time frames. He wants to see the monthly chart looking smooth and the daily chart showing a similar pattern.
Asset Selection and Volatility [45:41]
Dhall prefers stocks due to their volatility and range, which provide more alpha to capture. He finds FX markets less efficient due to high-frequency trading and smaller ranges. He also notes that stocks have fewer variables than FX and lack the economic impact associated with currencies and commodities. Dhall advises trading in the middle portion of a daily candle's range and emphasizes that winning 50% of the time is sufficient with proper risk management.
Pros and Cons of the Strategy [49:53]
Pros:
- Simplicity: Easy to understand and implement.
- Mechanical and rule-based: Suitable for beginners.
- Specific time windows: Allows traders to choose when their brain works best.
- Trading with the trend: Aligns with market momentum.
- Fractal nature: Can be applied to higher time frames.
Cons:
- Restrictive risk-to-reward: May limit potential gains.
- Requires courage and patience: Demands discipline to follow rules and wait for alignment.
- Speed: Fast decision-making may be a hurdle for some.
- Technology and access: Direct market access may be necessary for scalping.
- Good loser: Requires the ability to accept losses.
Chart Examples: SPY and DAX [1:06:03]
Dhall provides chart examples, starting with SPY, illustrating the strategy's application. He points out auction areas, gap levels, and potential short setups based on the daily downtrend. He then examines the DAX, showing a long trend and a successful trade above the moving average. Dhall also discusses crypto, highlighting auction breakdowns and potential short opportunities.
Time Frame Considerations and Fundamental Analysis [1:13:34]
Dhall cautions against overcomplicating the strategy by adding too many time frames, which can create conflicting biases. He emphasizes that the daily auction provides key information about market sentiment. For swing trading, he recommends weekly and four-hour charts, while pension funds may consider quarterly charts. Dhall highlights the importance of understanding fundamentals, such as yields, to gauge market sentiment and potential pullbacks.
Psychology and Risk Management [1:17:24]
Dhall concludes by reiterating that strategy is only one part of successful trading, emphasizing the importance of psychology and risk management. He notes that traders in his community who take fewer than three trades a day tend to be more successful. Dhall stresses that traders need coaching and community support to develop these essential skills. He encourages viewers to leave comments and questions, which he will be happy to answer.