tactical trader

In part one you were introduced to the operating theory and inner workings of the Directional Day Filter. In this, the second of three articles, you will see a number of examples of how the filter works in practice and learn how to use the filter on sideways days.

The filter in action

In the below chart, from part one of this article, we determined that the majority of the activity 60 minutes into the trading activity is above our average line, suggesting the trend for remainder of the day on this chart should have an upward bias.

An additional indication of an uptrend is given by the close of the 60-minute bar being found considerably above the average line. The chart below contains the complete chart for the day in question.

In the chart above you will observe five black arrows that identify the new highs for the day as the trading day progresses. Note that five new highs were made for the day while the low for the day remains unchanged. Thus the day above meets our definition of an uptrending day.

Also note on this chart the many small downtrends that develop during the day which, when exhausted, provide excellent opportunities to enter the market in the direction of the dominant trend (higher). There are methods by which traders are able to not only identify these exhausted downtrends but also pick highly accurate points for entry into the market for the next move higher.

Briefly, trades are generated only on the long side in this instance, in the direction of the major trend of the day. Although this is by no means a perfect day to trade this or any other system, the methods used here can be successful in both taking a few small profits from the market but, occasionally more importantly, keeping us out of trouble by not trading significantly against the trend.

Now let’s examine a day displaying the opposite trend.

The chart above displays the one minute chart of the S&P 500 futures from July 5, 2000 for the first 60 minutes of trading for that day.

First of all, note that the vertical black line represents our average price of 1480 and that the vertical bar marks the 60-minute point of the day…