What is the ADX

The definition of the ADX from Investopedia is:

An indicator used in technical analysis as an objective value for the strength of trend. ADX is non-directional so it will quantify a trend's strength regardless of whether it is up or down. Read more: http://www.investopedia.com/terms/a/adx.asp#ixzz2IWtXGd00

You also have more information on ADX on the StockCharts.com website.

The Buy Signal

Having the ADX above 40 is not a rule that influences the technical analysis of buying a stock or not, but it could influence your risk management. We have seen in the past, stocks that rally even when the stock is above 40.

For example, with PCLN from the moment where the ADX was above 40 (02-24-2012) to the moment that we got the sell signal on the 03-29-2012 the stock had a climb of $121.69 per share based on the close of the entry date and the open of the exit day.

 

So the implication of the ADX above 40 is that it is up to the trader to decide whether to place the trade or not. Usually if a trade is placed, the percentage of risk should be reduced because we are more likely to get out again due to the Bishop. The decision of entering a trade or not is always yours. 

The Bishop

The Bishop is a "one day" signal where The Stock Butler will inform you to exit the next day at open your position.

It is possible to place a new order after a Bishop to get back in case the stock rallies again, but - and this is something that the Bishop cannot tell - a special precaution should be taken on re-entering a position as the ADX is still above 40. Knowing the chances of another Bishop signal are good, some traders would enter with the ADX above 40 with 1/2 one's normal risk.