Futures trading involves focusing on the larger picture while executing based on smaller timeframes. Once the trend of a larger cycle is established, one should look for entry points during the pullback within a smaller cycle. This is a right-side trading logic widely used in trend trading.

The underlying logic of this trading model comes from Dow Theory's definition of trends. According to Dow Theory, trends operate in a wave-like pattern. For instance, an uptrend is defined as a series of subsequent rallies that each close above the highs of the previous rally, with each pullback stopping above the lows of the previous uptrend (a downtrend is the mirror image of an uptrend).

In simple terms, trends run in an infinitely continuing N-shaped pattern. Today's discussion is about selecting entry points at the pullback points of the N-shape.

In Dow Theory, the illustration of an uptrend running in an N-shaped pattern shows that after the establishment of a bullish trend, the market continues to break higher and create new highs, with each pullback stopping above the lows of the previous pullback.

The blue oval area represents the pullback trend we are discussing today.

Why focus on the larger picture while trading on a smaller scale?

Advertisement

Focusing on the larger picture while trading on a smaller scale is to achieve a higher reward-to-risk ratio in trading. By entering on a smaller cycle, the space for the stop loss is reduced. Once the larger cycle trend unfolds, it allows for the effect of capturing large space profits with a small stop loss.

Two methods for selecting entry points in actual combat are explained below.

Method 1: Use the Fibonacci retracement as a support level. After the pullback tests the Fibonacci support, enter on a smaller scale when the moving averages cross.The candlestick chart of the peanut contract 2304 shows the 1-hour level on the left and the 5-minute level on the right. After the market on the left side rose from 9740 to 10302, a bullish trend was confirmed. Following this, the market experienced a correction. By drawing the Fibonacci retracement levels based on the market's high and low points, when the correction reached the 50% Fibonacci level, which is 10007, the chart was switched to the 5-minute level. At this level, a golden cross of moving averages was formed, signaling an entry. The stop loss was set at the low point of the correction.

In the right-hand chart, there were two entry opportunities. After the first entry, the market moved up only a small space before a deep correction occurred, resulting in the order being stopped out. After some consolidation, the market formed a golden cross again, and the order was re-entered. This time, the market rose significantly.

Two points should be noted here:

(1) The risk-reward ratio was very high. By entering at a smaller level, the effect of taking a small stop loss for a large profit was achieved. The stop loss space for the second entry was 81 points. After the market turned bullish, the first wave of the uptrend rose to 10978, a movement of 1000 points, resulting in a very high risk-reward ratio.

(2) There were two entry opportunities in the chart, with one resulting in a stop out and the other in success. Not all trading opportunities are 100% successful. Profitability in trading relies on the success rate and the risk-reward ratio, which is why we use the logic of looking at the bigger picture while trading at a smaller level to improve the risk-reward ratio.

Method 2: Use the upper and lower Bollinger Bands as support. After the larger time frame market corrects and tests the Bollinger Bands, enter on a smaller level using the N-shaped breakout structure.

In the candlestick chart of the peanut contract 2304, the left side shows the 1-hour level, and the right side shows the 5-minute level. After the left side of the chart confirmed the trend at the 1-hour level, the market corrected and tested the lower Bollinger Band. The chart was then switched to the 5-minute level.

On the right side of the chart, at the 5-minute level, an N-shaped upward breakout occurred, signaling an entry. The stop loss was set at the lowest point of the N-shape. After entering, the market began to rise.Pay attention to this: Trends at different levels operate in an N-shaped structure, with larger N-shapes composed of smaller ones, and they initiate from the smaller N-shapes. This is the logic of the relationship between the sizes of market trends. Only by understanding this logic can we effectively trade with a focus on the larger picture while managing the smaller details.

Lastly, let's discuss how to choose the appropriate ratio between larger and smaller time frames.

The trading logic of focusing on the larger picture while trading the smaller details requires a certain proportional relationship between the time frames to be effective.

If the time frames are too close to each other, the trends will be very similar, making it difficult to achieve significant profits. For example, the 1-hour time frame is very similar to the 30-minute time frame, with the market space also being similar, thus eliminating the effect of leveraging the small to achieve the large.

If the time frame span is too large, the stability of the smaller time frame is poor. Although the risk-reward ratio will be very good, it can lead to too many stop losses and make execution very difficult. For instance, entering a trade on the 1-minute chart based on a 1-hour time frame will result in poor stability.

Here are three common proportional relationships between larger and smaller time frames for reference:

- 4-hour time frame, enter on the 15-minute chart.

- 1-hour time frame, enter on the 5-minute chart.

- 15-minute time frame, enter on the 1-minute chart.

The two entry methods mentioned above, as well as these three common proportional relationships between time frames, should all be combined with your own trading strategy for backtesting before going into actual trading. Confirm their effectiveness and feasibility before entering the market, and do not use them directly without testing.