Copyright (c) 2010 Dr. Jennifer Feeny
Every day you will come across a new trending indicator. The number of trending indicators now available is mind boggling. Almost all these trending indicators use price and volume in their charts. So using many will not give you an advantage. What you need to do it to use only one trending indicator and combine it with candlestick patterns to generate accurate trading signals.
First, you need to eyeball the chart to determine if the market is in a trend. You can also use the ADX ( Average Directional Index) Indicator to determine the trend. Unlike the oscillators that have a range between which they oscillate, a trending indicator has no upper or lower bound. The higher the trending indicators reading, the stronger the underlying trend!
Now, technical analysis is almost same for almost all markets with some slight variations or modifications. These trending indicators are applicable to stocks, forex, futures, options,commodities, futures, gold, crude oil, ETFs, bonds and almost anyother market. The basic mechanism or what you call market dynamics is the same. The three most popular and useful trending indicators are: 1) MACD (Moving Average Convergence Divergence), 2) Moving Averages and 3) DMI (Directional Movement Index (DMI).
Directional Movement Index (DMI) is a powerful trending indicator. DMI not only reveals the direction of the trend but also tells whether it’s strength is increasing and when it is about to end. DMI is composed of three charts or plots.
+DMI, -DMI and ADX. +DMI ranges between 0 and 100 and indicates how effective the bulls were in pushing prices above the last day’s high. -DMI also ranges between 0 and 100 and shows how effective the bears were in pushing prices below the previous days low. ADX measure the difference between the two +DMI and the -DMI. ADX gives the strength of the trend.
You need to master this DMI indicator. Trader use the crossovers between +DMI and -DMI as trading signals. For example, when +DMI crosses above the -DMI, it is a signal that the buyers are now controlling the market. And when -DMI crosses above the +DMI, it tells that now the sellers are controlling the market.
But if both +DMI and -DMI cross each other frequently, it is an indication that neither the bulls are strong nor the bear. Both are wrestling with each other and are unable to overcome the other. In other words, what this means is that the market is ranging or consolidation.