How to Identify Strong Trends and Enter on Consolidation

I had noticed that the 20 period moving average seems to act as support in strong stocks on the day, and that price often consolidates sideways until it meets the 20 MA where it often bounces off and continues the next leg of its run.

From Raschke Ch. 10 The Holy Grail, I learned a method for measuring the strength of a trend and a more precise method of entry and exit using the ADX and a trailing 1-bar high buy stop.

Raschke Ch 10


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, re-enter 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.


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