Posted by forex at 5:17 AM
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1. Set up the charts with the indicators. Open your charting software or use a free charting website on the Internet and pull up the price data on the financial instrument on which the analysis will be performed. Add to this chart the Average Directional Index (ADX) and Directional Movement Index (DMI) -- the DMI will be displayed as two lines: +DI and -DI. The ADX is the 14 period average of the Plus Direction Index (+DI) and the Negative Directional Index (-DI). The combination of the +DI and -DI comprise the DMI.
2. Establish criteria for when the market is in a trend. Using the ADX indicator, a market is considered to be in a strong trend when the reading is above 25. A reading of 20 indicates a trend is present and will provide more signals than a 25 reading. This reading does not discriminate between an uptrend and a downtrend; it only indicates that a trend is present.
3. Spot potential turning points by watching for crossovers in the DMI values. To spot the emergence of a potential uptrend, wait for the +DI line to cross above the -DI line while the ADX remains above 20. A downtrend often develops when the -DI crosses below the +DI and the ADX remains above 20.
4. Implement additional filters. To avoid of the risk of continually buying and selling in choppy market conditions, add an additional indicator such as a 50 period moving average to the price data. This will provide more insight into the overall trend. Only take trades that are in the same direction as this longer term indicator. When price is above the 50 period moving average, only trades where the +DI crosses above the -DI with the ADX above 20 are traded. When price is below the 50 period moving average only trades where the -DI crosses below the +DI with the ADX above 20 are traded.