This title is just a joke! We called this chapter the Holy Grail, because it is one of the lightest models in this manual. ADX based (Average Directional Index, average direction index) Welles Wilder, this strategy works in any market in any time frame.
Before, how will we continue, should read ADX. Simply put, ADX measures the strength of a trend over a period of time. The stronger the trend in any direction, the higher the ADX. (If you would like more information on constructing and interpreting the ADX, We recommend the "Guide for Technical Traders on Computer Analysis of the Futures Market" (Technical Traders Guide to Computer Analysis of the Futures Market) Charles LeBeau and David W. Lucas.
When prices in a strong trend make new highs (minimum), should always buy (sell) on the first rollback. Holy Grail exact method, used by us to determine the moment of opening a position after recovery. Opening this deal, we expect the previous trend to continue.
One of two results usually follows. Retrying may fail at the previous high / low - in which case a small profit can usually be made. In the second scenario, a whole new phase of the trend continuation will begin. At worst, it is a very low risk entry point with multiple exit options.
FOR PURCHASE (FOR SALE – VICE VERSA)
1. 14-periodic ADX should get bigger 30 and keep on rising. This identifies a market with a strong trend..
2. Look for price retracement to 20-period exponential moving average. Usually, price recovery is accompanied by a decline in ADX.
3. When the price touches the 20-period exponential moving average, place a buy stop above the high of the previous bar.
4. Once executed, enter a protective sell stop at the newly formed swing low. Trail your stop as you accumulate profits and exit at the high of the most recent swing. If you think, that the market can continue its movement, you can close only part of the position at the high of the most recent swing and bring stops for the rest of the position closer.
5. If the trade is interrupted by a protective stop, reopen it, placing a new buy stop at the original entry price.
6. After a successful trade, the ADX should rise higher again 30, before another retracement to the moving average can be traded.
EXAMPLE 10.1. Wheat - December 1995 of the year.
14-periodic ADX more 30, and the price retraces to the 20-period exponential moving average. At the point 1 the market breaks out above the high of the previous bar, giving a signal for a long entry. Our original stop is placed at B, most recent minimum recovery. The purpose of our trade is to sample point A, most recent swing high, which happened at the point 2. Another deal takes shape in July. The price is trading on a 20-period exponential moving average, and a buy stop is placed above the high of the previous bar. We open at a point 3, and our original stop is placed at point D, minimum recovery. We are awaiting a sample of point C, most recent swing high, and this goal is achieved at the point 4.
EXAMPLE 10.2. Citicorp (CCI) – 1995 year.
There are two trade patterns on this chart. ADX more 30, and the price corrects back to the 20-period exponential moving average.
Our buy stop is filled above the high of the previous bar. The original stop is placed at point B, minimum recovery. We are awaiting re-sampling of point A. The goal of our trade is achieved at the point 2. Another trade is entered at the point 3. The market reaches our target level C at 4.
EXAMPLE 10.3. Orange Juice - 60 Minute Bars.
This pattern is especially well suited for intraday trading.. At point B, the market retraces to a 20-period exponential moving average, and ADX is larger 30. We enter at the point 1 on a buy stop above the high of the previous bar and start waiting for a retest of level A. Our original stop is placed at point B — in this deal we risk no more than 150 Doll. The market is closing in our favor, so we leave the deal the next day. The next morning, the continuation occurs in the form of a gap at the opening, where do we exit our deal.
EXAMPLE 10.4. S&P - 60 minute bars.
This market is so strong, that the price crossed the 20-period exponential moving average, moving sideways for a while, rather than rolling back. We enter at the point 1, where the market exceeds the high of the previous bar, then we put a stop at the very last low, The market makes a new upward movement, and a small range extension bar at the point 2 informs, when it's finished. A period of rest follows, in which the market corrects sideways again, not down. At the point 3 you could open another deal.
We found: when prices recover after a strong movement, 20-the periodic exponential moving average tends to act as support / resistance for these retracements. Waiting for, while the market goes above the high of the previous day, you get more confident confirmation of a renewed long-term trend.
NOTE: many traders think wrong, that a decline in ADX indicates a trend reversal. It's rarely true. ADX usually peaks, when does it start consolidation prices. This scheme is easy to find. We hope, that you will spend time on your own study of charts and research of this scheme. We are thinking, you will see soon, why we named this chapter "The Holy Grail"!
Material taken from Books “Exchange secrets” – Connors, Raska.
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