A generally accepted trading principle is that strongly
trending stocks will pull back for a few days and then resume their
previous trend. This is especially true in the early stages of a move. The
pull back will come in the form of sideways movement or a few down days
(for up trending markets) or up (for down trending markets). This has been
written about and exploited in
Hit and Run Trading by Jeff Cooper and in
Street Smarts by Larry Connors and Linda Raschke.
One of the best methods for consistently taking money
out of the markets is to buy strong stocks when they pull back and to
short weak stocks when they attempt to run up. When you select your
pullback candidates from those stocks in very strongly trending groups, your edge is
enhanced. This is because momentum does not end quickly or easily. Even
stocks that have topped out typically have a return or reflex rally that tests
their highs. This is why the odds are increased in your favor when you buy
pullbacks in the strongest names.
This pullback can be used by Trend Traders as a way of
accumulating stocks before the previous move resumes. How far the stock
can run…is impossible to predict. If you can minimize the downside and
allow the stock to run, you can have an excellent reward to risk.
We are using the ADX of the stock to measure the major
trend. Hence the term ADX Trades. The temporary change in direction
against the ADX is based on stochastics.
The rules for using the ADX trades in the
newsletter or in the daily subscription newsletter are simple.
Buy tomorrow at the recommended price but not more
than ¾ point above the recommended price.
If the position is filled place a stop sell at the
For Short Sales
Sell short tomorrow at the recommended price but
not more than ¾ point below the recommended price.
If the position is filled place a stop buy at the
A signal is not valid unless it
trades at or above the entry price for buys and at or below the entry
price for short sales.
Gap rule – Any buy
recommendation that opens ¾ point above the stated entry price and any
sell recommendation that opens ¾ point below the stated entry point should
be ignored for the day.
Money management is extremely important. I
personally recommend and use a system using stock volatility. Using a
dollar volatility management, this system allowed over 1 ¾ point average
per trade. The ADX system was successful over 60 per cent of the time.
This means that the profit to loss per trade was over three to one. Most
winning trades showed small gains but this was supplemented by a few large
After position has been initiated, place a
Take partial profits quickly. As soon as your
profits are equal to or greater than initial risk, you should lock in
half of your profits and move your protective stop on the remaining
shares to breakeven. You can use a trailing stop. This is discussed in
Connors on Advanced Trading Strategies.
Take windfall profits.
Do not risk more than 2% of your account on any
Never add to a losing position.
Enter the entire position at once.
If the stock is not closed out by
hitting the profit expectations or exit strategy, exit
on close day 5.