Trading the DMI with ADX, TSI and EMA (WHEATUSD) Pullbacks
Updated
So far, I’ve focused on how to get into the market based on the DMI swap in dominance between the +DI and -DI. Once you’re in or if you missed the original entry, how can you get into a trend while minimizing your risk. As I’ve noted before, I’ve not been able to successfully trade on a regular basis but my hope is to use everything I’m documenting here to change that.
In one of the links that I shared in my first article is a PDF that has some really good stuff on using the PDF to trade breakouts. In it, there is a section on how to trade pullbacks within a trend using a 20 period EMA. In my charts, I use a combination of the 13 and 26 period EMA to sort of do the same thing (I use a range between the two vs. just one EMA).
Full credit for the strategy is given in the PDF and the basics of it are outlined as follows:
1. The ADX must me moving up and above 20
2. Look for a price retracement to the 20 period EMA. It goes on to note that “usually the price retracement will be accompanied by a turndown in the ADX”
3. When price touches the 20 period EMA (in my case, when it enters the range or touches the 26 period EMA), “put a BUY STOP above the high of the previous bar”
4. Once filled, enter a protective stop at the newly formed swing low
5. If stopped out, re-enter the trade by placing a new BUY STOP at the original entry price
6. After a successful trade, the ADX must once again turn up above 20 before another retrace
The PDF walks through this strategy as outlined above along with providing some examples.
However, the examples are based on the same time frame as the original entry. I’d like to explore and propose that in a strong trend at the daily level, the 4 hour chart will provide a short term strategy. By applying the same concept to the 4 hour chart as outlined above then you may be able to find points that either provide opportunities to enter into an existing trend, or add to positions you may already have within the trend.
As the 4 hour chart begins to show weakness and a breakdown below the 26 EMA, it’s possible this is an indication that the daily chart will now cycle through the same steps as noted above which would provide an opportunity take profit on existing positions while waiting for the next setup to enter with the trend on the daily chart.
I’ve hi-lited areas on the 4 hour chart for WHEATUSD that fit into this strategy with the current up trend on the daily chart that started recently. Note, that the last area in yellow appears to be breaking down below the 26 EMA signaling that the daily chart may begin to cycle through it's own pullback.
In one of the links that I shared in my first article is a PDF that has some really good stuff on using the PDF to trade breakouts. In it, there is a section on how to trade pullbacks within a trend using a 20 period EMA. In my charts, I use a combination of the 13 and 26 period EMA to sort of do the same thing (I use a range between the two vs. just one EMA).
Full credit for the strategy is given in the PDF and the basics of it are outlined as follows:
1. The ADX must me moving up and above 20
2. Look for a price retracement to the 20 period EMA. It goes on to note that “usually the price retracement will be accompanied by a turndown in the ADX”
3. When price touches the 20 period EMA (in my case, when it enters the range or touches the 26 period EMA), “put a BUY STOP above the high of the previous bar”
4. Once filled, enter a protective stop at the newly formed swing low
5. If stopped out, re-enter the trade by placing a new BUY STOP at the original entry price
6. After a successful trade, the ADX must once again turn up above 20 before another retrace
The PDF walks through this strategy as outlined above along with providing some examples.
However, the examples are based on the same time frame as the original entry. I’d like to explore and propose that in a strong trend at the daily level, the 4 hour chart will provide a short term strategy. By applying the same concept to the 4 hour chart as outlined above then you may be able to find points that either provide opportunities to enter into an existing trend, or add to positions you may already have within the trend.
As the 4 hour chart begins to show weakness and a breakdown below the 26 EMA, it’s possible this is an indication that the daily chart will now cycle through the same steps as noted above which would provide an opportunity take profit on existing positions while waiting for the next setup to enter with the trend on the daily chart.
I’ve hi-lited areas on the 4 hour chart for WHEATUSD that fit into this strategy with the current up trend on the daily chart that started recently. Note, that the last area in yellow appears to be breaking down below the 26 EMA signaling that the daily chart may begin to cycle through it's own pullback.
Note
Adding another market to watch BTCUSD as it could be playing out a similar scenario that Wheat just did (except to the down side.
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