Jan 242014
 

The Holy Grail is of course, not the Holy Grail, but was named so by Linda Bradford Raschke and Laurence A. Connors for its simplicity. This setup is quite popular as both of them are prominent traders.

RULES FOR LONG HOLY GRAIL

  1. 14-period ADX be above 30 and rising
  2. Look for retracement down to 20-period SMA
  3. Place buy order at the high of the bar that touches 20-period SMA

RULES FOR SHORT HOLY GRAIL

  1. 14-period ADX be above 30 and rising
  2. Look for retracement up to 20-period SMA
  3. Place sell order at the low of the bar that touches 20-period SMA

WINNING TRADE – HOLY GRAIL TRADING SETUP

Holy Grail Winning Trade

Holy Grail Winning Trade

This is a daily chart of Hewlett Packard listed on NYSE. The bottom panel shows ADX rising above 30. ADX measures trend and this criterion identifies strongly trending markets. In this trending stock, we saw a pullback to the 20-period SMA and we entered at the high of the bar that touches the SMA. The trend continued beyond this chart and gave a profit potential of around $9.00 per share.

The ADX only served to confirm what prices showed. The series of 13 bullish bars was all that anyone needed to see the upward trend. The marked bar was an great entry point as the day actually gapped down significantly before rebounding up within the day. An extremely bullish sign.

LOSING TRADE – HOLY GRAIL TRADING SETUP

Holy Grail Losing Trade

Holy Grail Losing Trade

This is a daily chart of EUR/USD spot forex. Again, ADX rose above 30, indicating a strong bullish trend. Prices then retraced to the 20-period SMA for a Holy Grail long setup. We entered on the high of a bullish reversal bar only to be stopped out two bars later.

This entry looked good with a nice bullish reversal bar as the signal, coupled with a possible failed downside breakout of the trading range at the top. But the increasing number of dojis showed a lack of buying pressure prior to the pullback. Also, before the marked reversal bar, we saw a verybearish outside bar. After entering the trade, the entry bar became a doji which was enough to get more conservative and nimble traders out of the trade to limit their losses.

REVIEW – THE HOLY GRAIL TRADING SETUP

This setup finds retracements within strong trends. While you don’t really need ADX to see strong trends as strong trends are hardly subtle, ADX keeps new traders out of trouble and provides a convenient way to scan for trending stocks.

Using ADX > 30 to identify trends has two drawbacks. First, a high ADX can mean that the trend is overdone and may reverse soon. Traders may enter at the worst possible price. Second, some more gradual and protracted trends may unfold entirely without ADX ever crossing above 30. This will result in a large number of missed trades.

Connor’s book explains how to re-enter a trade and to look for a second retracement. The authors explain the concepts underlying a variety of trade setups very clearly.

Source: Street Smarts: High Probability Short-Term Trading Strategies