By Mark David Johnson Mark David Johnson
Level: Basic PLUS
Mark Johnson is a full time TradeStation programmer, trader, and trading coach. He has personally developed over 60 strategies and over 200 indicators for the …
To be a successful trader you must know when a trend is starting, the strength of the trend, and when the trend is ending. Knowing these trend events is crucial since a trend is the fundamental market mode for most profitable trading methods. Having access to this trend information when it is timely and accurate can dramatically increase your trading profits.
One of the most commonly used yet outdated tools to identify trends is the ADX indicator. The ADX line rises to show the strength of a trend. The most accurate means of using the ADX is to only pay attention to a rising ADX line, since that is when the trend strength is the strongest. Most ADX Indicators have a threshold level line somewhere around twenty or twenty-five. When the ADX is above that threshold you have a trending market and when it is below that threshold it is not trending. It’s important to know these details about a trend, unfortunately, the ADX is too “hit and miss” at delivering this important trend information.
A huge problem with the ADX Indicator is the long “lag” recovery time that occurs after a strong up move. Just look at a chart with a quick strong uptrend followed by an immediate quick strong down move. You will see that the ADX Indicator completely misses the second down trend movement since the ADX line is still in a recovery phase. Another ADX deficiency is that it gives no information about the direction of the trend. I know you can use other indicators like the DMI+ and DMI- to get the direction of a trend, but I want each and every indicator on my chart to provide the most amount of accurate and timely information as possible. So why not use a trading indicator that does a lot more than the old outdated ADX Indicator can?
The Price Action Indicator is the perfect ADX Indicator replacement for the following reasons:First, it accurately answers when a trend is starting, the strength of the trend, and when a trend is ending.Second, it gives this information without “lag”. Getting these signals in a timely manner translates to more profitable trading.Third, it tells the direction of the trend without the need for other indicators like the DMI+ and DMI-.Fourth, it can be placed right on your price bars to see the inter-relationship between the price bars and the Price Action Indicator.
The Price Action Indicator simply and clearly displays all of this trend information. It shows the start of the trend by changing both the color and direction of the price action line. It displays the strength of the trend by increasing the thickness of the price action line. It does all this without the “lag” inherent in the ADX Indicator. Finally, it can be placed directly on the price bars to see the trend’s relationship to the price bars, making this a vastly superior tool over the ADX. The Price Action Indicator replaces the ADX, DMI+, DMI- and most moving averages.
As fantastic as the TradeStation Price Action Indicator is, the price action line that we have covered above is just one line taken from our Multiple Time Frame Price Action Indicator which is made up of 8 different time frames price action lines. The MTF Price Action Indicator provides the greatest trading “edge”.This article has been viewed 27 time(s).
Article Submitted On: January 09, 2011