Holy Grail setup (Linda Raschke)

Why it works

The ADX indicator measures trend strength, not direction. When ADX is above 30 and rising, the market is in a strong directional phase, and the first retracement to the 20-period average is usually bought by participants who missed the move.

Requiring a strong ADX filters out most of the sideways markets where pullback trades fail.

The rules

Setup

• 14-period ADX above 30 and rising: a strong trend is in place.
• Direction from price: making new highs (long) or new lows (short).
• Price pulls back and touches the 20-period EMA.

Entry

• Long: place a buy stop above the high of the candle that touched the 20 EMA.
• If it does not trigger, move the buy stop to the high of the next candle while price stays near the average.

Stop loss

• Below the low of the pullback (the swing that touched the average).

Exit and management

• Take profit at the recent swing high, or trail the stop under each new candle low.
• Exit if ADX turns down sharply and price closes back below the 20 EMA.

Filters that improve it

• Only the first pullback after ADX crosses above 30; the later ones get weaker.
• Skip it if the pullback takes more than 8–10 candles: the trend has probably lost its energy.

Worked example

Illustrative Nasdaq 100 example on 15m: ADX is at 36 and rising after a strong rally. Price dips to the 20 EMA at 18,410 with a candle whose high is 18,432. A buy stop at 18,433 triggers on the next candle; the stop goes below the pullback low at 18,395. The target, the high at 18,500, gives about 1.8R.

Illustrative numbers, not a recommendation.

Common mistakes

• Using it with ADX below 25: in weak trends the 20 EMA is crossed constantly.
• Buying the touch itself instead of waiting for price to break back above the previous candle.
• Confusing ADX with direction: ADX rises in strong downtrends too.

How to practise it

In Candlemind add the EMA 20 and the ADX from the indicators menu. Read a few candles: if ADX is above 30 and price touches the average, place a pending buy or sell stop beyond the touching candle.

Count how often the first touch works versus later touches: that is the core of the setup.

Pre-trade checklist

1. ADX(14) above 30 and rising
2. Price making new highs/lows (direction)
3. First pullback to the 20 EMA
4. Stop order beyond the touching candle
5. Stop behind the pullback swing

Frequently asked questions