a new look at the average directional index · directional movement index or “dmi” the key to...

A New Look at the

Average Directional Index(ADX)

A webcast presentation for the Market Technicians Association

Presented by Chuck LeBeauDirector of Analytics www.SmartStops.net

October, 2010

Introducing the

Average Directional Index (ADX)

The ADX shows us the

strength of trends by measuring the amount of

Directional Movement

Note: The ADX is sometimes called the Directional Movement Index

or “DMI”

The Key to Using ADX

• A rising ADX shows that the

strength of the trend is increasing

(more directional)

• A falling ADX shows that the trend

is weakening (less directional).

ADX Components

• The ADX is made up of the Plus DI and the Minus DI

• The Plus DI shows the amount of Positive (upward) directional movement.

• The Minus DI shows the amount of negative (downward) directional movement

Plus DI

Minus DI

No DI

Plus and Minus DI measure

Directional Movement

Market in balance

ADX declines

Market out of balance

ADX rises

Applying the ADX

• The direction of the ADX is the key!• A rising ADX tells us the trend is strengthening

and we should follow the trend.• A falling ADX tells us the trend is weakening and

we should trade counter-trend.

• Important: The absolute level of the ADX is not predictive. A low level indicates that the market was sideways. A high level indicates the market was trending. Only the current slope or direction of the ADX tells us what is most important : what is happening NOW!

The ADX can also be used forselling short

• Minus DI must be above Plus DI

• A low ADX level is not important

Practical applications of ADX for entries

• What to enter: To identify the strongest marketslook for markets where the ADX is rising.

• How to enter: The direction and slope of the ADX also tell us how to enter.

• If the ADX is rising rapidly, enter immediately “at the market” before you miss a big move.

• If the ADX is rising slowly or falling, it is OK to wait for cheaper prices and do some bargain hunting.

ADX Tops and Bottoms Pattern

• The ADX can sometimes be used to detect and trade major “V” shaped tops and bottoms.

• Setup: The ADX line must be higher than either the Plus DI or Minus DI. The high ADX indicates that a strong trend has been in place and may reverse soon. Best “V” signals will occur when the ADX is above 35.

• Trigger: The fastest entry signal is when the Parabolic point is crossed.

• Confirmation: DMI crossings will confirm the reversal.

Buy

Sell

ADX signals a “V” bottom

followed by a “V” top

ADX highest

ADX highest

ADX highest

Buy when Parabolic

is crossed.

ADX “V” bottom pattern

Practical applications of ADX for exits

• When ADX is rising - Be patient and look for big profits.

• When ADX is falling - Be cautious and take profits quickly before they get away.

ADX Summary

• Use slope of Aeasure and compare strength of trends

• Use ADX to choose correct trending/non-trending strategy

• Know the correct entry method – enter now or be patient and enter later

• Recognize important “V” tops and bottoms

• Know when to quickly take small profits and when to patiently hold for large profits

ADX Summary

• Use slope of ADX to measure and compare strength of trends

• Use slope of ADX to choose correct strategy (trending or non-trending) for each market

• Know the correct entry method – enter immediately or be patient and enter later

• Use unusually high ADX to recognize important “V” tops and bottoms

• Know when to quickly take small profits and when to patiently hold for large profits

Be sure to visit Chuck LeBeau’s Web Siteswww.traderclub.com or www.SmartStops.net

To learn more about ADX you can order Chuck LeBeau’s Workshop DVD package

“How to Design, Test, Evaluate and Implement Profitable Trading Systems”

Includes - 2 DVDs with more than 5 hours of instructionIncludes - helpful Workshop WorkbookIncludes - ADX based “High Beta” stock trading system

All for only $250.00 - credit cards or PayPal welcome

Order by phone: (928) 639-1337 or clebeau2@cableone.net and ask me to bill you via PayPal

Questions are welcome

For questions or to receive a free copy of this PowerPoint presentation

send an e-mail toclebeau2@cableone.net