In this scenario, the had its below 20 since July 3rd. When trading with DMI/ADX, periods of breakout after the has been below 20 for at least 7-10 periods can provide good results. In this case, the 4 hour chart had dropped below 20 for an extended period too.
On July 17th , price moved up which caused the to cross up over the . Based on Wilder's strategy, you would place a buy stop above the high of the day (either the high or a number greater than it). With this strategy, you may consider the stop at a point below the low for the same day. In cases where the daily range is small, then placing orders in this way may not cause too much of a draw down. However, in case where the daily range is large, the risk is much higher though there are cases where it's just the way it works out (recent ngas activity that I'll use in an example in a future article). Alternatively, you could choose to place the stop at something like a 75% retrace of the daily candle when placing the buy stop at the high of the day.
Another option is to place your buy order as a limit order somewhere in the 25-75% pullback of the daily range that caused the DMI to swap .
On the 4hr chart, marks the day that daily DMI swapped dominance while shows the 25/50/75% breakdown of this price range.
While this strategy can reduce the risk of having a larger draw down, it also introduces the risk of missing a trade. I'll review more examples of both of these scenarios in next article.