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Contradictions in using ADX |
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Technical Analysis Articles |
Written by Chuck LeBeau |
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| 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.
Good luck and good trading
by Chuck LeBeau |