For example, do we ignore this trade just because ADX dropped below 30? Probably not, to me it looks like the trend is still going up.
On the testing, is the entree automatic when the stock hits 20 ema or does it buy the high of the previous bar and are stops right below bar that penetrated 20ema. Time frame was dailies?? Can u test intra day??
If there is a Holy Grail for trading, everyone will be millionaire. Who is going to serve me dinner at a restaurant ?
This is just a method that was popularized by Linda Raschke. Apparently, she feels this method is as close as you're gonna get.
Who needs a Holy Grail? Just find a system with Profit Factor > 2.0 and Sharpe ratio > 4.0 and you'll have no problems following the signals. Define precise measures to determine when the underlying dynamics of the market are no longer valid within the parameters of the system and adjust or stop using the system. It can and is being done by those in the <1% club.
As I mentioned before, I didn't do the coding on this particular program, so I'm not 100% comfortable with saying in absolute terms whether it works or not. I went back and looked at the trades generated on the IBM daily chart and saw that the exits seemed to be a bigger problem than the entries - the program was holding for too long. I tossed in a simple moving average cross over exit and things improved considerably. This makes my think that by using a more structured exit (maybe a trailing ATR) you'll find something that works well on some stocks. You might want to add another filter - ie volatility. Best of luck. I'd be interested to hear what others think about this pattern and its applicability to current market conditions.
I did a backtest of a "Holy Grail" based method a few months ago with WealthLab - profit ratio is more than 3.0. pretzel