9/9/2019 Price Action Adx
The ADX is a unique indicator that shows the characteristics of a particular trend. The ADX tells us when there is a trend and also when there is no trend, so we know when to use a trend following strategy and when to use a range trading strategy. For this trend-following strategy, we’ll look for the ADX to signal trending market conditions.
Photo credit – tOkKaThere is no such thing as the holy grail trading system. Although if there is.You think it would solve all your worries and money issue?Most beginners focus on buying and testing several systems until it gives you a high accurate prediction.Unfortunately most doesn’t work throughout the year.I wish trading was easy. Just buy a system and let it run or implement what it teaches.This is not possible after spending 7 years of my youth and flushing money down the drain, burning the midnight oil and watching the market 24/7.There is no one system that can handle the many outcomes of the market.Humans are unpredictable but our actions give away the calculated patterns.If you wish to handle the market, you must first understand what is the market doing.The market only does 2 things. It is either trending or channeling.There is never one time is two conducting in the same timeframe.So how do you get your system to understand what the market is doing? And most importantly is it sustainable?Using ADX has made this possible.Here is the explanation as well as 3 tactics I’ve learned that can help you assess market action.
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What Is Forex ADXForex ADX or average momentum index is a trend following indicator.It measures the emerging of a trend or at least the level of momentum in a trend.Forex or foreign exchange is a multi-billion dollar industry that allows you to make money out of thin air with the click of a mouse.Forex ADX is an indicator that is solely but not exclusive to measure the strength of a trend in the market. Strength Of The TrendIn Sun Tze, The Art of War.Before a battle is fought, the general need to identify the weakness and strength of the enemy.Focus on attacking the weak while avoiding or depress the strong.Hence to trade profitably in forex, we need to understand when the market is strong so that we can trade with the trend.And where it is weak in order to trade in the opposite direction. Done with less risk and fear.This is where ADX or average direction index comes into play. Speed Of The MarketADX measures the speed of the market. It shows when the market is strong in its sentiments.And when the market is irrational bouncing up and down.The good thing the calculation is done for us through this 4 key points1.
Absent or Weak Trend. If Forex ADX resides between 0 and 25 level mark then we could conclude that the market is quiet or irrational.This is the time where the market is forming a channel and it is best to trade short term.Any potential support or resistance level is likely to hit with a big reversal.Best to trade expecting a false breakout.2. Emerging Trend. If ADX shoots over the 25 level mark and stays between the 50 mark. We can safely assume that a sentiment is borne.If you are lucky and present during a channel, most likely a valid breakout is imminent.For added safety net, it has to be done just after London open.3.
Very Strong Trend. If ADX exceeds and lingers between the 50 and 75 level mark.
Ride it like no tomorrow.Don’t wait for a pullback, don’t trade against it. This is where most traders are trapped because they trade against the stronger direction.Traders who are trapped are lured by the market consolidating or in a channel phase. This is where the price gets rejected from both ends of the market.The fact that they are looking at lower timeframe doesn’t help them see the big picture.4. Trend has Peak. And it might not be sustainable.
Hardly price will reach this far but if it hit more than the 75 mark.Look the other way for opportunities.For going against a trend, you might want to be caution with a tight stop and a good handle of price action with candlestick chart pattern. Conventional Approach To Forex ADXa. Start of a Trend. As you can see in point a.The indicator tells us the start of a downtrend. Indicators are always lagging behind price action.So when trading read price action first. Everything else is secondary.Having said that, you still can go home with more than 20pips on this daily chart.b. Bearish Divergence of a Trend. What this means is that price is exhausted and the current run up is its last breath.If you look at the moving averages highlight in orange and purple the trend is on average rising.So if you don’t have a position in this trend up.Don’t go in now wait for a pullback or wait for ADX to rise from below 25 again to get in on the trend.What do you do with this divergence?It depends on which timeframe you are at.You still can take a shot down and that will earn you more than 20pips.Always remember price is leading and ADX is always reacting.
You need more time to benefit from a lagging indicator.c. Sideway Trend. If you are not in on the action going long then you do not want to enter a position here.If you notice it takes at 3 peaks of ADX to realize that price is changing direction.So always takes price into consideration whenever ADX claim that trend has peak or a divergence has occurred.This is because humans are behind price and humans have short term memories.So if the current trend is long most likely others will follow suit until someone with a fat account pushes it down.d. Trend Continues. Here is where you can reenter the position to go long if you wish.Do take note we are looking at a daily chart of the Yen futures.So if we are going long here it will be after 15 days later.e. Another Bearish Divergence. Same as point b. Notice ADX at this point has a sharp downtrend on its line.ADX has no direction biasing.
If its line goes up usually mean trend is strong actively.And when it goes down it usually means a lot of hesitation but the trend is still there.Do note price is still the leader here. Do not get too fixate on ADX.They only act as a filter to double confirm what you perceive about the market.f.
Scalpers Paradise. It is always easy to see what has happened in the chart.The tricky part is the end of the chart where the price has yet show anything.From my own experience, I can tell you that Yen future is heading for a long sideway market.So what this means cross currency pair that has JPY in it could be heading for a lot of hesitation.So don’t expect a lot of liquidity and volatility. When you take up a position keep what the market gives don’t expect much.
A Lagging Indicator Has Its Own ProblemADX is an indicator and that means it measures price after it has happened.It doesn’t tell whether the strength of the market is sustainable until some time later.There are a few cases where ADX bites back without implementing some sort of price action or candlestick pattern. Case Study – Forex ADX With Signal And EntryTactic #1 – When ADX Crosses 25 Level, Herd MentalityThe above image shows an after the market has moved. But it is still a valid strategy and entry if you do it this way.I usually take notice when ADX rises from below the 25 level mark.In terms of price action, the price was forming a channel before a breakout which coincides with ADX where it rises and hit the 25 level mark.As shown in point c. I would place 1 to 5 pips a sell limit below the last candlestick that creates the 25 level mark.It is late but not the last as price trend down.If you notice this is a daily chart hence even if you are late the trend has just started.When ADX goes above 25, theoretically speaking a trend is emerging. And all reversal pattern, price action or candlestick pattern becomes invalid.If new traders trade without using ADX, some might go against a trend.With ADX we can tell when a trend is in motion or when the trend has slow down or cease into range bound.This has been shown in the next image as we show how traders are trapped.
When ADX Crosses 25 Level, Traders Get TrappedNew traders who saw what seems to be an opportunity to trade against the trend get “pissed in the wind”.They are easily trapped by trading against the trend.Trading against the trend is not only not risky but the risk to reward ratio is not that profitable.
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