TradingMarkets 10 Rules for Successful Trading: Rule 9

Today's PowerRatings article will focus on Rule No. 9 of TradingMarkets 10 Rules For Trading.  Rule No. 9 states: Avoid being churned; stay out of markets which have low ADX readings.

The Average Directional Movement Index (ADX) measures the strength of a trend.  When the 10 period ADX of the market or a stock drops below 20, it usually means the security has become trend-less. And as we all know, it's very, very difficult to make money in a trend-less market. Our research has found that it is best not to trade in securities while they have 10-period ADX readings under 20. And, we have found that the higher the ADX, the better the range the security will likely be.  Readings above 40 indicate a strong trend. Note that ADX is not used to determine the particular direction whether up or down. 

Here are seven weekly charts of stocks that have ADX readings above 40 and PowerRatings of 7 or above and 3 or below.  Next week I will share a strategy on how to use our stock scanner to find these types of stocks quickly and simply.  The TradingMarkets.com stock scanner can be found here.

Business Objects (BOBJ | Quote | Chart | News | PowerRating)

Medicis Pharmaceutical (MRX | Quote | Chart | News | PowerRating)

Pall Corp. (PALL | Quote | Chart | News | PowerRating)

Satyam Computer Svcs (SAY | Quote | Chart | News | PowerRating)

UnumProvident Corp. (UNM | Quote | Chart | News | PowerRating)

Helen of Troy Ltd. (HELE | Quote | Chart | News | PowerRating)

Wolverine World Wide (WWW | Quote | Chart | News | PowerRating)

From 1995-2005, stocks with a PowerRating of 8 have outperformed the S&P 500 index on average by an 8.3-to-1 margin, while a PowerRating of 10 doubles that performance to 16.3.

PowerRatings also help indicate a stock's downside as well as timely short-sale entry points; PowerRatings of 1 and 2 have on average lost money over the next week. A PowerRating of 1 typically underperformed the S&P 500 by a 5-1 margin. Obviously, you should ideally be looking to buy high PowerRating stocks and avoid (or short) low PowerRatings stocks.

You can attend a free class on how to use PowerRatings, presented by Steve Primo, our Director of Education.

Click here to try PowerRatings for yourself, risk free.

Darren Wong
Associate Editor
darrenw@tradingmarkets.com

Reminder: We are in no way recommending the purchase or short sale of these stocks. This article is intended for education purposes only. Trading should be based on your own understanding of market conditions, price patterns and risk; our information is designed to contribute to your understanding. Controlling risk through the use of protective stops is critical.