Posted by forex at 5:32 AM
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Confirm The Trend
1. Use the Average Directional Index (ADX) to determine whether the market is trending or in a trading range. If it is in a trading range you know that moving averages may not be useful indicators.
2. Look at the level showing on the ADX indicator panel. If the indicator is currently 40 and above it indicates that there is a strong trend. If it is currently below 20 then it indicates that the trend is weak and that the market may be in, or entering, a trading range.
3. Note the direction of the ADX indicator. If it is not very far above 40 and is sloping downward, the strength of the trend may be weakening fast. Similarly, if it is sloping upward and might soon cross above 40, then the market might be leaving a range and entering a trending phase.
Confirm the Signal
4. Confirm the signal generated by the moving average crossover by looking at another indicator. As the Traders Place website states, 'As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.'
5. Use other criteria to confirm the signal generated by the moving averages. You might want to wait until the shorter moving average has remained above or below the longer one for three days, for example, if you are using a longer-term trading strategy.
6. Study the actual chart. As well as looking at indicators and using filter criteria before making your trade, look at the chart for obvious pitfalls. For example, although you may think the market is trending by looking at indicators and so on, when you look closely at the chart itself it may become clear that it is actually in a trading range.