Learning ADXodus Trading Strategy
When the market goes into consolidation, novice traders get bored. They came to Forex to earn money, and the dull sway of currencies from side to side does not allow to saddle the trend and use the “buy and hold” principle. Newcomers to the story have figured out how to increase a deposit by entering a trade at the beginning of a trend, and are looking for couples with a clear trend. Traders with experience only mysteriously smile, looking at inexperienced players. Everyone who has worked in the market for a long time knows that trends are replaced by consolidations, and trading ranges are giving way to new trends. You can catch their beginning only in conditions of complete calm.
There are different opinions about the nature of consolidations. Some associate them with the accumulation or distribution of positions by large players, others call the market an attempt to establish a fair price for the asset. From a practical point of view, consolidations provide a unique opportunity not to guess where the exchange rate will go. A trader needs to act on the breakthrough of the trading range, guided by the principle: “ the longer it takes to form, the more chances there are to get the asset to transition to the trend stage ”. According to Charles Schaap, a lifelong member of the International Association of Hedge Funds, author of the book “ADXcellence: Power Trend Strategies”, in order to start using certain strategies, it is necessary that the consolidation continues not less than 30 bars. One of the trading systems he called ADXodus.
As the main confirmation signal that we are talking about exactly the trading range that we need, Shaap recommends using the readings of the 14-period ADX indicator. If for most of the time it is located below both lines + DMI and -DMI, the market is really full calm. A breakthrough of the upper boundary of consolidation forces ADX to soar above the critical mark of 25, but it is not yet the basis for opening a deal. The author of ADXodus recommends waiting for the correction, which is accompanied by a rollback of the indicator of average directional movement. The main thing is that the + DMI and -DMI lines do not intersect. If this does not happen, the situation is completely controlled by the bulls, and the trader needs to determine the depletion of the corrective movement in order to enter a long position.
A purchase can be made according to one of three schemes. The most aggressive one involves entering the long at the maximum of the bar, on which a correctional minimum was recorded. Such an approach is fraught with a large number of small losses, but it is it that allows you to catch the upward movement almost from its base. A neutral strategy is based on opening a long position at the level of the upper border of the previous trading range. Finally, a conservative approach involves buying an asset at a recent high. A protective stop order in all three cases is placed at the bottom of the correction.
Charles Schaap recommends using a floating stop to close the deal, but each trader has developed his own approach to this issue over the years. Proponents of harmonious trading actively use the AB = CD pattern to identify the target. Its targets of 261.8% and 361.8% make it possible to get a very decent profit factor.
Thus, no need to be afraid of consolidation. Do not run away from the calm in the Forex market. On the contrary, the longer consolidation lasts, the more attention should be paid to the asset.