Charts and technical indicators are the two most important things for a trader. Charts combined with technical indicators are powerful tools in the hands of a savvy trader. You can find the trend in the market by looking at the charts. But you can never find the strength of a trend by simply looking at the chart. For this you need to master one basic technical indicator. There are many technical indicators. Everyday a new indicator is being introduced now a days. What you need to do is to master two or three and that's it. Mastering this trending indicator is must for you!
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 these trending indicators can be applied to almost all markers stocks, futures, currencies, commodities, ETFs and so on. So mastering one trending indicator can give you the edge to trade different markets. The three major trending indicators are: 1) Moving Averages, 2) Directional Movement Index (DMI) and 3) Moving Average Convergence Divergence (MACD).
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.
However, frequent crossovers between the +DMI and the -DMI means that neither the bulls nor the bears control the market. This will reflected by the ADX being below 20 meaning the market is ranging. Most charting software now available provide DMI in the arsenal of indicators that you can use. DMI is calculated over 14 days and ADX over 25 days. You need to master this one trending indicator.
Author Resource:-
Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE. Discover the Internal Strength System -a stock trading course that can make you rich in 2010!
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