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Advanced technique #9 (System Selection Technique)

Choosing the right strategy for trading is a strategy by itself. (from Edward)
All credits and special thanks to Arsalan, the author of this technique.

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Hello everyone and thank you Mr.Edward Revy for publishing my ADX+EMA SYSTEM.

I want to share one very good idea with everyone.
This is not a trading strategy but a technique to determine which system to use and when. There are many systems available to use some are trend following systems like moving average crossover and some are oscillator based system which utilize indicators such as Stochastic, Rsi and William %R but if all these systems are good then why they work sometimes and sometimes they fail?

The reason is selection of a good system at wrong time.

We can overcome this problem with the use of one simple indicator ADX(14)

The level of ADX can help us to decide which system to use at a given point of time.
Now let me explain you how to accomplish this goal.

PLOT ADX(14) ON CHART FOR YOUR CURRENCY PAIR.
IF...
1)ADX is below 20 - USE OSCILLATOR BASED SYSTEM(RSI,STOCHASTIC ETC.)

2)ADX is above 30 - USE TREND FOLLOWING SYSTEM(MOVING AVERAGE,MACD ETC.)

3)ADX is at 45 or above it - BOOK PROFITS.(Wait for new entry)

4)ADX IS RISING FROM LEVEL BELOW 18 AND THEN GOING ABOVE 23 - USE TREND FOLLOWING SYSTEM.

5)ADX DECLINING FROM LEVEL ABOVE 30 AND THEN GOING BELOW 27 - USE OSCILLATOR BASED SYSTEM.

The above mentioned method will help you select right system at right time. This system selection technique works very well according to my experience.
I want to tell you again that this technique only helps to select right system at right time and it is not a holy grail.

I hope everyone will like this system selection technique and use it to improve their trading.I use this for trading in stocks and hope it will work well in the forex market.
A GOOD SYSTEM NEVER FAILS IT FAILS ONLY BECAUSE IT IS USED AT A WRONG TIME.

Happy trading,

Regards,

Arsalan.

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Greetings from Edward!

As an update I'm posting a screshot and explanations to it, to help everyone to understand this great method from Arsalan.

System selection method using ADX

There are 3 blocks:
1. The market is moving sideways
2. The market is trending
3. The trend is weakening, re-evaluation of forces begins

Block #1:

The market is moving sideways.
We can simply see it, but also we can get clues from ADX indicator, which now stays below 20.
Signals of which indicators should use for trading in this conditions? We use everything but trend indicators:
- Bolliger bands - the price will bounce off BB levels.
- RSI - react to oversold/overbought zones
- Stochastic - Stoch crosses, especially those in oversold/overbought zones.
As you can see in Block #1, they all give true signals.
Unlike MACD, which is revolves around zero line, crossing back and forth. It is useless.
Also Moving averages (which I didn't put on the chart, it is too messy already :), they also will give false signals, and thus should be ignored.

Block #2:

The market is trending, which is confirmed by ADX, it moved past 20 and is rising.
What indicators and systems to use? Use trend following indicators obviously:
- MACD is good.
- Moving averages would be good.
Unlike now RSI and Stochastic - they will remain in oversold /bought zones (depending on a trend) for a long time.
Unlike also Bollinger bands - the price won't obey its boundaries anymore.

Now, ADX reaches 45 - it is time to think about collecting or protecting profits. The trend is mature. We look for the clues from our trending indicators. In this case the earliest signal is received from MACD histogram (circled in purple), which changes color from red to green. Later confirmation for those who missed, comes from MACD lines crossover; and even Stochastic and RSI finally come out from oversold zones (small letter "c" - confirmation - on the chart).
When traders are out the trend begins to weaken, ADX starts to fall, price retraces upwards.

Block #3:

- ADX is falling, which means the trend has gone, at least temporarily.
We don't know whether it is going to continue or not, so we seek advice from indicators, but not a single one - a group of them.

ADX in this case becomes useless until it begins to rise again.
Why? While ADX is falling two things may happen: first - the trend will take a break - ADX will continue to fall; second - the new trend (uptrend in our case) may begin sharply - ADX will also continue falling only confirming that a downtrend is weakening yet more. (During sharp turns in the trend ADX is late with a responce, a recognition of new trend. During slow turns it is accurate.)
So, whether a new uptrend begins sharply or an old downtrend weakens, ADX will show the same tendency - it will fall suggesting no clear trend... That's why we don't use ADX when it is falling.

So, later in block #3 we get a strong Sell signal from all 4 indicators:
- price meets BB and retreats,
- RSI overbought,
- Stochastic overbought,
- MACD histogram has changes from bullish to bearish.
That's a signal to Short.

I hope you followed me through without difficulties.
If not, feel free to ask me or Arsalan any question about the method.

Happy trading!

http://forex-strategies-revealed.com/

very insightful.
could u post some charts to illustrate?

Done!

Hi,

There is no need for any visual explanation through chart because all you have to do is plot adx for your currency pair and look for the level of adx if it is 30+ then use trend following system and likewise you can check at what level is adx and then decide what kind of system to use whether trend following or oscillator based and then just use your systems buy sell signal to trade.I have clearly explained at what level what kind of system to use in my strategy.
I think there is no need to explain this method through chart because it is so simple to understand and apply.

Let me give you an example of how to use this method.
Eg.Suppose i plot adx(14) for currency xyz and the level of adx for it is at 33 i.e. it is above 30 so according to my system selection technique i will use trend following system like Macd, moving average crossover etc. to trade this currency and all i will have to do is to use my trend following systems buy sell signal and in the similar way if adx level would have been below 20 i would have used oscillator based system like stochastic,rsi etc.I hope you after reading the aforementioned example all your doubts will get clear and if you still do not understand then ask about your doubt specifically and so that i will be able to answer you easily and clear your doubt.

Happy trading,

Regards,

Arsalan

Look very good.
Thank you so much for detailed description and bothering to share it with us!

Andy

Hi Arsalan,

It seems to be a very good explanation for using an appropriate system.It is indeed very insightful,and thank you very much for this guidance.

venkats.

You are welcome Andy

Arsalan

You are welcome Venkats

hello,
great system. please i'm not very conversant with the uses of ADX. please can you explain to me its uses. because when i checked it on he chart i noticed 3 different lines.I wonder which line will I consider.
Pls you can mail your response to lanrefabiyi[at]yahoo.com.
Thanks

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