Monday, April 20, 2009

The ADX Filter Rocks My Socks Off

I took a major step forward in my trading by stumbling on this ADX phenomenon last week. So why do I love it so much? 1. I trade cyclical price action, not trending price action. In fact, I think most of us (Stan, Michael, Awais) all trade cyclical price action. We buy or sell into what we believe are tops and bottoms and want some kind of reversion to a mean out of them right? Well let me be the first to tell you the best way to get high odds setups isn't to put trades on in markets that are trending.

This one little thing has revolutionized my outcomes. Fair disclosure... it will filter 80-90% of price action on most days on smaller intraday charts. I actually like this for two reasons. 1. I don't have to pay attention 80% of the day looking at every little squiggle and wiggle. 2. I have less trades, less commission, less market risk, and HIGHER WIN RATES. All i'm saying gents is take a look at it.

A simple slow stochastic crossover can be a powerful ally IF its filtered with an ADX telling you the market isn't trending. Here's a little experiment for you all. Go back on a 1 minute chart of whatever your trading (NQ, ES, EURUSD, Whatever) and look at all the stochastic crosses that get overbought and oversold and then crossover. Pretend that the SlowK crossing the SlowD is the "trigger candle". Mediocre results right? Now go back and filter out every trade where the "trigger candle" has an ADX value higher than 20. Tell me what you see. Is there more to it that that? Sure. But what i'm saying is oscillators are so much more effective when we filter out trending environments. What we are saying by asking for the ADX to be less than 20 is that we want to get in at the beginning of the trend and let the trend develop with us already in the move.

I went ahead and modified my ADX indicator to alert me when the ADX crosses from > 20 to < 20 on close or basically when a non trending environment has started to form. Now all I have to do is play on the internet until Tradestation alerts me I may have a potential setup. Easiest damn trading i've done in years today.

So onto that. My first trade of the day wouldn't let me fill. Had the order staged buy didn't get filled. I "missed" out on 3 points but that's just shit that happens. I took 5 trades today, had 1 par, 4 winners, and a no loss day. Now it won't all be like this and some days I probably won't have any trades due to the ADX filter but whats left for me to take is going to be very high odds setups that are primed to work! Less trades and more money is fine by me.

Trade Results:

ES: +125.00
NQ: +60.00


Michael said...

Hummm... I just went over several day's of charts and I see what your saying. But in theory I don't get it, I thought that when the trend is strong (ADX >20) and you have a pullback with stochastic 80/20 that this would be the ideal setup, a pullback within a strong trend. Looking at the examples it seems the opposite is true, unless I'm mistaken about how to interpret ADX readings.

I'm going to take another serious look at this, the first time I looked into it I didn't see anything, but now I do.


Matt said...

Yea, well that's the thing Michael. Everyone and their mothers tit has been saying you want a strong ADX value to indicate a strong trend. I mean TTM and others teach this very principal.

But what i've found is that its actually very misleading because what the ADX is actually saying is that the trend is already apparent and you've missed it. And actually what you set yourself up for is getting on the wrong side of the market trying to sell it as it advances with an ADX >20 (ie trending, but trending against you!) or vise versa.

By getting a low ADX, the market direction hasn't been decided, and thus, the market tends to respect oscillators MUCH MUCH better.

E-Mini Player said...

Well done!

Anonymous said...

Very interesting. I am also interested in range trading and would like to filter TSX Venture with the ADX and the crossovers. Do you recommend any software that act as filters for an exchange like TSX Venture? How do you filter?
(As you can tell I am very new to all this)