DislikedHey everyone,
I, too, love the ADX indicator. I have used many indicators in the past (MACD, stochs, RSI, CCI), but ADX has quickly become my one and only indicator.
I bought Welles Wilder's book "New Concepts in Technichal Trading Systems" and, even though it's quite obvious the book was written DECADES ago (back when people calculated their indicators by hand and plotted their charts on graph paper), he formulated a wonderfully simple trading plan off the Directional Movement lines (+DI * -DI) that still works to this day.
Here's the secret that Wilder lays out in his book that most people don't know about: The Extreme Point Rule.
Most people try to trade ADX by entering long whenever +DI crosses -DI or go short when -DI crosses +DI. This, inevitably, leads to whipsaws and people throw in the towel and think that ADX just doesn't work as a standalone system. Instead they just ADX as a confirming indicator.
But Wilder knew about the shortcomings of just trading DI crosses. That's where his Extreme Point Rule comes in, and that is what makes ADX a system all by itself.
Here's how it works:
On any given candle where the directional movement is great enough to cause the DI lines to cross, you wait until the bar closes. Then, when the bar closes, you DO NOT automatically enter a trade in the direction of the DI cross. You take the high of the completed bar (if +DI crosses above -DI), or you take the low of the completed bar (if -DI crosses above +DI) and place either a buy stop or sell stop past the extreme point. Wilder points out in his book that the candle that causes the DI cross is, usually, very significant. Often times, if +DI crosses up, the extreme high of that candle will not be passed. Then price falls and -DI crosses up and price continues to move lower.
If someone was trading all DI crosses blindly, there would be a whipsaw when going long and then price falling and forcing them to close out at a loss. The Extreme Point Rule would keep them out of the trade, however.
Let's take a look at how this works in practice:
On the attached chart, look at vertical line one. At that point, -DI crossed over +DI. The low of that candle is used at the Extreme Point. (Actually, I personally add some extra pips. For example, on the GBP/JPY, I will usually subtract 10 pips from the exteme low, or add 20 pips to the high). The Extreme Point was passed on the next candle, taking us into a short.
At vertical line 2, +DI crossed over -DI. Again, the high of that candle is taken and 20 pips added to it (10 pips + spread). That's where our stop loss for our short position would be, as well as a buy stop to take us long. As you can see, however, the extreme point was never triggered, and we stayed short.
At vertical line 3, -DI crossed over +DI and a new extreme point is defined. If you aren't already short, you can take that extreme point, subtract 10 pips, and put in a sell stop. If you are already short, you can possible take this as an opportunity to add to your position. The extreme point was triggered on the next candle, continuing the down trend.
At vertical line 4, +DI crossed -DI again. We then take the extreme point, add 20 pips, move our stop loss and put in a new buy stop order. As you can see, the exteme point was never triggered.
At vertical line 5, -DI crossed +DI, we had a new extreme point defined, the buy stop would be cancelled and a new sell stop would be placed 10 pips below the extreme point. This extreme point was triggered shortly after, and the downtrend continues.
This system is not foolproof. Even with the Extreme Point Rule, there are some whipsaws and some losses. What this system does do, however, is keep you in for the really LONG trends that will more than make up for the whipsaws. For example, the first short would have been put in at 209.52. Price is currently at 205.26. That's 426 pips so far.Ignored
I like the look of this setup thanks
Can this be worked on the daily and weekly charts and
what would the stops be.
And would the ADX be 14 for daily/weekly