Contradictions in using ADX
In our last article we described how the ADX works best when a move develops out of a basing pattern. Someone sent us a very courteous email questioning this strategy and reminded us of our "25 X 25"Bond system where we want the ADX to be above 20 before looking for an entry. He commented that by the time the ADX gets to 20 any move out of a base pattern may be over. He is absolutely right and I can see how there may appear to be some confusion on how the ADX should be applied. But there really isn't any contradiction if you understand that what we are trying to do with the ADX is very different in the two examples.
In the "25 X 25"strategy the ADX is used as an important "setup"condition that tells us when the trend is strong enough that we can confidently buy on weakness. However, when we describe the basing pattern strategy we are using the ADX as the actual entry trigger to buy on strength. There is a big difference in the buy on strength and buy on weakness strategies. In the basing pattern strategy a low level of the ADX is preferred because the rise in the ADX is the trigger. If the ADX is at 12 and starts rising we very well could miss the majority of the move if we waited for it to reach 20. With the ADX already at 20 or higher it might only be safe to buy on dips and of course that is exactly what the "25 X 25"bond strategy does.
To sum things up: there is no contradiction. To catch a move out of a base you should enter as soon as the ADX starts rising. Just compare today's ADX with yesterday's ADX and the faster it is rising the better. At this point the the lower the level of the ADX the better because we are buying on strength and the ADX is our entry trigger.
System Results Update
By the way, our bond strategies have been making lots of money this year. Hope you are all trading them with real money. Back in February I had lots of critics calling and asking why we were offering long only bond systems when bonds were at 115 and that had to be the top. They said that they couldn't possibly go much higher than that and our long only results could not hold up in real trading. Now that the bonds are over 130 I am glad that we have the Serendipity system that does trade the short side because I suspect that we really are near the top. (Doesn't take a genius to make a dumb statement like that. I apologize.)
The Big Dipper system has been long since July and has huge open profits even after having to be rolled forward from the September contract into December. The "25 X 25"system is not doing bad either. When is the last time you had a free system make that much money for you? And last but not least, lets not forget the "Little Dipper". According to my recollection the last seven trades were all winners and it could be more because I can't remember the last loser. Not too bad for out of sample trading results. REMEMBER: PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE SUCCESS. I'm not just saying that because I have to. I really believe it and so should you. The bull market in bonds has made us look smarter than we really are. Bull markets do that.