This month’s strategy tests a system designed to trade in consolidations in the equity market. Figure 1 shows a buy-and-hold equity line for the Active Trader Standard Stock Portfolio from June 1997 to May 2007. The amount of time spent in consolidations and pullbacks of varying lengths certainly exceeds several years — time during which a trend-trading approach will not work.

The system uses the Average Directional Movement Index (ADX) indicator developed by Welles Wilder to identify non-trending market conditions and then enters and exits short-term trades using a simple price pattern (see "ADX consolidation breakout," Futures & Options Trader, May 2007, p. 28).

Active Trader Trading System Labs: 2007