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Mentor Update :
(Sample Mentor Update)
Early Trend Direction
The Average Directional Index (ADX) is one of Welles Wilder's more inspired creations. It is available on virtually all charting packages and, for the day trader, one of the more useful indicators. We like to use the ADX as an early trend detector. Use an ADX with a period of 14 units and place this on a 1-minute bar chart.
Put a horizontal line on the ADX window at the 16 level. Whenever the ADX falls to this level or below, be prepared for price to start trending. Since price moves start on the shorter time frames and cascade to longer and longer time frames, this technique will indicate the beginning of all trends -- large or small.
On the accompanying chart from May 21, 1999, notice the arrow at "1" on the ADX corresponds to the beginning of the down move at "A" on the price chart. Arrow "2" corresponds with the move "B."
Don't get confused and think of a declining ADX as indicating a move down. The ADX measures trendiness and the higher the value the greater the trend up or down. This is shown by the arrow marked "3." ADX has fallen to the 16 level line in the ADX window, indicating price is ready to trend. The arrow at "C" on the price chart shows price moving up.
The ADX has more uses for the daytrader than early trend detection.
When used with the proper indicators, the ADX can detect early reversals.
We will explore this and other uses of ADX in upcoming Mentors. Meanwhile,
plot this indicator as described above and see if you don't agree that
this is one of the daytrader's more valuable tools.
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