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Here is a sample of their work copied from the Stratagem Newsletter at
www.stratagem1.com
winter 1996 vol 2 #1. Go to the web site to see the charts.
Walter
- 0 -
"Street Smarts, the new book by Larry Connors & Linda Raschke promises to be
one of the hottest releases of 1996. The book provides clear and concise
strategies, with lots of examples. It is a compilation of precise setups,
and is geared toward the active trader. “Consider it to be a collection of
Surgical strikes with a distinct methodology for managing each one!”
The Holy Grail
Just kidding about the title! We named this chapter the Holy Grail because
this is one of the easiest patterns in this manual to trade. Based on Welles
Wilder’s ADX (Average Directional Index) this strategy works in any market
in any time frame.
Before we continue, you will need to be familiar with the ADX. Simply
stated, the ADX measures the strength of a trend over a period of time. The
stronger the trend in either direction, the higher the ADX reading. (If you
would like more information about the construction and interpretation of the
ADX, we recommend that you read Technical Traders Guide to Computer Analysis
of the Futures Market, by Charles LeBeau and David W. Lucas.)
When prices make new highs (lows) in a strong trend, you should always buy
(sell) the first pullback. The Holy Grail is a precise method we use to
measure when to enter a position after a retracement. Once we are in this
trade, we are looking for a continuation of the previous trend.
One of two outcomes typically follows. The retest will either fail at the
previous high/low in which case a small profit can usually be made. In the
second scenario, a whole new continuation leg begins. At the very least, one
is offered a very low-risk entry point with several options for managing the
exit thereafter.
For Buys (Sells are reversed)
1. A 14-period ADX must initially be greater than 30 and rising. This will
identify a strongly trending market.
2. Look for a retracement in price to the 20-period exponential moving
average. Usually the price retracement will be accompanied by a turndown in
the ADX.
3. When the price touches the 20-period exponential moving average, put a
buy stop above the high of the previous bar.
4. Once filled, enter a protective sell stop at the newly formed swing low.
Trail the stop as profits accrue and look to exit at the most recent swing
high. If you think the market may continue its move, you might exit part of
the position at the most recent swing high and tighten stops on the balance.
5. If stopped out, reenter this trade by placing a new buy stop at the
original entry price.
6. After a successful trade, the ADX must once again turn up above 30 before
another retracement to the moving average can be traded.
Exhibit 10.1 Wheat - Dec. 1995
The 14-period ADX is greater than 30 and the price retraces to the 20-period
exponential moving average. At point the market breaks out above the high of
the previous bar, signaling a long entry. Our initial stop is placed at B,
the most recent retracement low. Our trade objective is a test of point A,
the most recent swing high, which was met at point 2.
Another trade sets-up in July. The price trades at the 20-period moving
average and a buy stop is placed above the high of the previous bar. We are
filled at point 3 and our initial stop is placed at point D, the retracement
low. We are anticipating a test of point C, the most recent swing high and
this objective is met at point 4.
Exhibit 10.1
Exhibit 10.2 Citicorp (CCI) - 1995"
Two trades set-up on this chart. The ADX is greater than 30 and the price
corrects back to the 20-period exponential moving average.
Our buy stop is filled above the high of the previous bar. An initial stop
is placed at B, the retracement low. We are looking for a retest of point A.
Our trade objective is met at point 2. Another trade is entered at point 3.
The market reaches our level C objective at point 4.
Exhibit 10.2
Exhibit 10.3 Russell 2000 Index
Even if we are not actually trading a market index, this set-up is still
useful in our overall market analysis. Four entry opportunities were given
in one of the strongest bull markets in the last five years. This example
was striking in how well the price was contained by the 20-period
exponential moving average.
Exhibit 10.3
Exhibit 10.4 Orange Juice - 60 Minute
This pattern is particularly well suited for intraday trading. At point B,
the market retraces to the 20-period exponential moving average and the ADX
is greater than 30. We enter at point 1 on a buy stop above the previous bar
’s high and begin to anticipate a retest of level A. Our initial stop is
placed at B Š we are risking no more than $150 on this trade. The market
closes in our favor so we carry the trade home overnight. The next morning’s
follow-through occurs in the form of an opening gap up where we exit our
trade.
Exhibit 10.4
Exhibit 10.4
When prices retrace after a strong move, we have found that the 20-period
moving average tends to act as support/resistance for these retracements. By
waiting for the market to move above the previous day’s high, you have more
certain confirmation of the resumption of the longer-term trend.
PLEASE NOTE: Many traders have the misconception that a turndown in the ADX
indicates a trend reversal. This is rarely true. Usually, the ADX initially
peaks as a price consolidation begins. This setup is easy to find. We hope
that you will spend time studying the charts and examining it for yourself.
We think you’ll soon come to see why we named this chapter The Holy grail
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