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ADX TRADES

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 runis 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 free weekly newsletter or in the daily subscription newsletter are simple.

For Buys

  • Buy tomorrow at the recommended price but not more than point above the recommended price.
  • If the position is filled place a stop sell at the recommended price.

For Short Sales

  • Sell short tomorrow at the recommended price but not more than point below the recommended price.
  • If the position is filled place a stop buy at the recommended price.

Important

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 point above the stated entry price and any sell recommendation that opens point below the stated entry point should be ignored for the day.

Recommendations

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 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 gains.

Money Management is described in The Three Day Hammer.
See details concerning this E-Book on the Home Page.

For free weekly subscribers, Id use the following general rules:

  • After position has been initiated, place a protective stop.
  • 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 detail in Connors on Advanced Trading Strategies.
  • Take windfall profits.
  • Do not risk more than 2% of your account on any given trade.
  • 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.
     

Copyright 2004 ARB Trading | Risk Notice & Disclaimer
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