ADX > 20 is a LIE

Recently i've made somewhat of a paradigm shift in how I trade (and simplified things about 10x's over) but I wanted to share a small observation I have made concerning "trending" markets and ADX readings.

First off, let me preface this by saying if you are a pure trend trader looking for MA cross overs or something into a bigger trend then this might not help you. For the rest of us going short and long based off S/R, trendlines, or Fibs then this will be relevant to you!

Ok, so we are all told from various software vendors, trading forums, trading websites, educational vendors that the GOOD trades are in trending environments correct? We are told to wait for the ADX to be > 20 to take a trade? Because then we know the market is trending right? I'm here to argue that this SIMPLY IS NOT TRUE. In fact - its the opposite.

I argue that the prime time to look for entries is in fact when the ADX <> 20 you are by definition jumping into a position after price has ALREADY MOVED A GOOD DISTANCE IN ONE DIRECTION. Thus, its probability of that trend stopping and a reversion to its mathematical mean is much much more likely which means a move against you is much much more likely as well.

Now on the other hand, by getting into a trade when the ADX <> 20. i.e. we only are looking for positions when there are green bars.

First thing to note - IF you trade like this it will be some of the easiest most carefree trading you've ever done. Why? Because ADX filters 70-90% of the price action on most days. And you sit and wait without a care in the world. I have the indicator set up to alert me when the ADX drops below 20 so I get a message saying pay attention and then we look for trades. This will DRASTICALLY reduce trade amounts, increase efficiency, reduce commissions, and eliminate the possibility of overtrading a market. Lets face it folks - most of us aren't good enough to be 100% on every swing 100% of the day. It gets us into trouble and we all know it. So why fight it? Especially if you can filter 70-90% of the day and only focus on tiny points on the chart where the probability for a trend developing is in your favor?

I apologize for the size of these charts but nothing peeve's me more than someone posting a chart example thats too small to see. You should have no issues here.

These examples will be nothing more than trendline breaks snapped to a Pivot High/Low reading on the charts. Entries on breaks of the trendlines with the ADX < 20. NOTHING ELSE. You decide the management and targets but it would be pretty hard to lose money here.

You are jumping in at the momentum shift BEFORE THE TREND OCCURS.

Now take a look at the entries where the ADX > 20 and the pundits would like to tell us its a GREAT TIME TO LOOK FOR TRADES. Almost everything loses.


Coincidence? That's for you to decide. I don't think it is coincidence. In fact this is exactly how I trade from here. ADX and trendlines. Call it a day and make money. Only we can complicate the hell out of it "looking for the trend". The truth is the trend is relative, and thus WE DEFINE IT. And if that's the case, everyone else has a difference definition and no one can be right or wrong. So why bother? Swing your middle finger up at the "trend" and forget about chasing it. Its a fruitless effort and a lie, and one that hasn't made too many of us rich.

Think its a fluke? Go look at it yourself. These examples were in Forex but the same technique applies directly to the emini's!

ADX and trendlines. The only tools you need to make yourself rich.

Cheers!

Back to Basics

I wanted to update on whats happened and where we go from here. Basically my "magic code" turned out to be a false holy grail and after some extensive backtesting I found it wasn't as consistent as I wanted and while it was almost fully automated (not that I intended to trade it that way) it just wasn't good enough. I wiped out the gains from the week and said f'it.

Awais got me back on track and focused on whats really important. Price action. Its the subject most of us know better than we would like to admit but we get too preoccupied looking at pretty squiggly lines to ACTUALLY SEE. The ADX phenom is real and valid as far as i'm concerned. That is the ONLY indicator on my charts. I will use nothing more than that as a qualifier for setups and trendlines for entries from here on out. Basics. I started doing this in sim on Thursday and was raking in money. On Friday I had one loss for -1.25 NQ points and more wins than I could count in the ES and NQ by 1PM. The consistency was through the roof along with the results and directly due to the SIMPLICITY of what I was doing. Trendlines are non-lagging price information and simply work if we let them AND if we use them in market conditions that are prime for momentum shifts.

I'd also like to thank Michael for sending me an indicator he coded up around the ADX (one I was working on but he saved me the time) to give a red light/green light indication of the ADX value. Really saves a lot of time visually backtesting things now. Thanks Michael!

I will be posting my full trade charts with my trendline entries here on out showing EXACTLY what i'm doing (No more hidden indicators Stan!). My following post will cover the ADX theory and chart examples of what i'm talking about when it comes to entries.

Rough Day

Not much to discuss. Took the signals, and they didn't really work out. Two pars in the NQ and three back to back losses in the ES. But the redeeming value is that the losses were all small (-.75 to -1.5) and they were on valid setups. Some of them worked a bit but reversed and that was just how they played out. I still have not lost any faith in the method though! One of the NQ trades I was in this morning went +70.00 in favor and reversed hard and fast. I couldn't get out of it and had no exit signal so I took a par on it.


Anyhow, that leaves myself about even on the week with one and a half days to go. I just have to keep after it!

Trade Results:

ES: -175.00
NQ: +0.00

Easy Trading

Not much to report today. Ended up with a par in the morning, a par and a loss in the afternoon. But overall i'm not at all disappointed with the outcomes thus far. I mean i'm hitting a 87% win rate so far this week. A loss on occasion is to be expected. But again, easy trading to report... just sit and wait for everything to line up and nail 'em when they do. Every trade I was in today went greater than 50.00/contract in the NQ and +75.00/per in the ES which means i'm not completely off my rocker. I just didn't get signals to get out of the trade and take profits and they reversed against me.


Perhaps I could be better at getting out of the failed trades with more than a par but I kind of feel like i'm doing just fine as it is. I don't want to be bailing on situations out of fear before they launch off in favor so i'll just keep doing what i'm doing.

Already this week i'm feeling more confident than ever in my methodology and entries and I think it will be more than apparent in the weekly results.

Trade Results:

ES: +0.00
NQ: -55.00

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

Par, Par, and a Par

Three pars today... + 1 tick in the ES net. Got in good moves and they just didn't run like they should. That being said, I am liking the ADX filter more and more. So easy to filter trading environments that aren't kind to me at a glance and whats left seems to be pretty good and conducive to my entries. I think my biggest thing moving forward is going to be trying to get out of the trades that I know aren't working and minimize losses.


Its a fine line to walk because I don't want to become a jittery scared trader jumping out of a move for a tick because I saw the market wiggle the wrong way. But at the same time I recognize that most of my trades that I "feel" are going against me do in fact do just that. As of right now though, I sit back and take the loss rather than be proactive and try and minimize it. But its a slippery slope and I need to be careful.

I just keep thinking back to about a month ago when I started demoing my pullback method and I was just hitting things out of the park that week. A lot of that was because I was jumping out of the ones I didn't like the markets reaction to quickly for small losses or tiny gains and holding the ones that just took off with me and trying to squeeze every last bit of profit out of. When i'm in my trades they should already be working for me. If they aren't i'm going to take the tick or two of losses and wait for the better opportunity to come along. My strict exit and management have been a crutch for me to stick to my rules but now I feel they are hindering my performance.

Regardless, I think the ADX filter was a great change and should help weed out bad entries in the coming weeks.

Trade Results:

ES: +12.50
NQ: +0.00

A bad day...

Just got stuck on the wrong side of the market today. And that got me thinking about my setups. By definition i'm looking for a non-trending environment for my most ideal setups to occur. If the market is in trend mode i'm going to get caught selling into advancing markets or buying falling ones. That's what happened on most of my losses yesterday and today. So I started looking back over my entries using a simple ADX filter and a qualifier of 20 to determine a trending environment.

Wouldn't you know it? 90% of my good entries that worked were where the ADX said the market wasn't in a trend. As with anything, it did filter a few winners as well but I really felt that the chunk of good trades that these entry methods were designed to hit were still left intact with the ADX filter. And the best part is on a afternoon like today, you don't even have to worry about getting caught selling into these markets. Michael - I know we look at similar things so if you're reading this take a look at it and see if it helps you!

So I applied the filter to the results from the past two days and was left with these outcomes in the ES:

• Unfiltered ES:
• Net P/L: +12.50
• Win Rate: 50%

• Filtered ES:
• Net P/L: +0.00
• Win Rate: 60%

Now at first glance the results are worse yes? But under closer examination I would expect to be more profitable filtered for two reasons. First, one of the filtered trades was my massive +150.00 winner yesterday. Which means that filtered there was still 150.00 worth of losses that I could avoid. Second, I had less trades and thus less commission cost.

And for the NQ:

• Unfiltered NQ:
• Net P/L: -65.00
• Win Rate: 43%

• Filtered NQ:
• Net P/L: +40.00
• Win Rate: 100%

Not only is the filtered results more profitable but it cut out 95% of the trades and left only one winner. This means that in the past two days it would've saved me 50.00 in commissions and still left me with more profit.

Now i'm not saying i'm impressed with these results. I'm not. But this week hasn't been ripe with opportunity and I haven't traded all that well, not to mention i've only had two days to trade. I'm leaning towards filtering these trades because from what I see its leaving me with the opportunities that the method was designed to spot and avoiding the dangerous conditions I don't want to be stepping in front of.


Here's what I know. The true cost of all of my trades this week including commissions is -127.50. The alternative isn't going to win me any trader of the year awards but it is undeniably better at a measly +10.00 after commissions. One thing is certain - I need to get this figured out and quick or I won't be around in a month.

Trade Results:

ES: -150.00
NQ: -80.00