Trend Strength Portfolio

ADX measures trend STRENGTH (how strong the trend is) while moving averages show trend DIRECTION and support/resistance levels. ADX tells you whether a trend exists; moving averages tell you where it's going. They complement each other well.

ADX alone only tells you strength, not direction. A high ADX could be a strong uptrend OR a strong downtrend. +DI > -DI indicates uptrend; -DI > +DI indicates downtrend. You need both pieces of information for complete trend analysis.

Aim for 10-15 positions for adequate diversification without over-complication. Start with 5-8 as a beginner. Maximum 4 stocks from any single sector - and on the ASX that cap fills fast with banks and miners, so deliberately reach into other sectors. More than 15 becomes difficult to monitor and dilutes returns.

DI crossover occurs when +DI crosses above -DI (bullish) or -DI crosses above +DI (bearish). It signals a potential change in trend direction. Combined with ADX > 20, crossovers can provide entry and exit signals.

Exit when: (1) ADX drops below 20 (trend died), (2) opposite DI crossover occurs, (3) ADX peaks above 40 and turns down (exhaustion), (4) price closes below 50 DMA, or (5) stop loss hit. Weekly monitoring helps catch these signals.

Exhaustion signs: ADX peaks above 40-45 and starts declining, DI lines converging, price showing reversal candlesticks despite high ADX. This is Stage 4 in the trend lifecycle - take profits and tighten stops.

For long-only investors, focus on uptrends (+DI > -DI). For advanced traders, going long uptrends AND short downtrends creates a market-neutral portfolio. Shorting in Australia requires a CFD account or a securities-lending arrangement - naked short selling is prohibited by ASIC, and single-stock futures are effectively defunct, so the F&O-style shorting common in India is not available here.

Stocks in trending sectors have tailwind support. Best setup: strong stock trend + strong sector trend (double tailwind). Avoid stocks with strong trends in weak sectors. On the ASX, sector rotation is largely a Financials-versus-Materials story driven by interest rates and commodity prices, so know which side of that rotation you are on.

Two methods: (1) 2x ATR below entry - adjusts for stock volatility, or (2) fixed 8-10% from entry. Trail stops using the 20 EMA as the trend progresses. Trend trades need wider stops than mean-reversion trades.

Weekly review: check ADX and DI for all positions, identify weakening/strengthening trends. Monthly full rebalance: re-run the complete scan, rotate out underperformers, rotate in new leaders. Frequent rotation is cheaper on the ASX than in tax-on-every-trade markets because there is no securities transaction tax or stamp duty - but brokerage and slippage still add up.

Combine multiple factors: ADX (25%), DI difference (20%), price momentum (20%), MA alignment (15%), sector alignment (10%), trend consistency (10%). Normalize each to 0-100, weight and sum for a composite score. Score > 70 = priority, < 50 = avoid. On the ASX, add a correlation/sector penalty so co-trending big-4 banks don't all surface together.

Trending bull: ADX threshold 22, full position size. Trending bear: ADX 25, 75% size, focus on shorts. Ranging: ADX 30 (higher bar), 50% size. High volatility: ADX 30, 50% size, wider stops. Detect regime weekly using A-VIX and market trend - calibrate to the lower A-VIX scale (above 22 is already elevated), not to offshore VIX levels.

Weight each position inversely to its volatility (Weight = 1/Vol, then normalize). Low-volatility stocks get more capital, high-volatility stocks get less. Result: each position contributes equal stand-alone risk. On the ASX, pair it with a sector/correlation cap - inverse-vol weighting tends to load up on the lower-vol banks, which are highly correlated with each other.

Key features: ADX momentum (5-day change), DI difference, sector ADX, price momentum (ROC), volume trend. XGBoost or Random Forest work well. For Australian markets, add the AUD/USD trend (the index is currency-sensitive via miners and offshore earners) and ASIC's daily aggregated short-interest as macro features.

Long sleeve: 10 stocks with ADX > 25, +DI > -DI. Short sleeve: 10 stocks with ADX > 25, -DI > +DI, executed via CFDs or securities lending (naked shorts are banned; single-stock futures are illiquid). Balance: 50/50 for market-neutral or 60/40 for long bias. Rebalance weekly and check ASIC short-position data to avoid crowded shorts. Profits from trends in both directions regardless of market.