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A Strategy for Market Entry and Exit - Part 2Part 1 can be found here: Key Tenants DMI is used as a triggering mechanism to establish support->resistance or resistance->support lines TRIX used to identify targets to exit and re-enter and on-going trend (if the DMI indicates a down trend, the a negative cross of TRIX over HMA would indicate a level to short Divergence can happen in both DMI and TRIX to indicate a weakening trend. With the TRIX, it can be a negative divergence where price makes new lows but TRIX makes higher lows or positive divergence where price is making a new low but TRIX is making lower lows in a blow-off fashion. Stoch indicates overbought/sold conditions with potential leading trigger on trade. Can leverage mid-point levels as trade continuation SUGARUSD:OANDA as an example reference 4hr chart above A. This is the period where the -DI crossed up over the +DI signaling that the trend was turning down. For Wilder, the low on this day would be the extreme point and you would enter a short position once price moved below it. A stop would be placed at the high of the same day as the cross. I’m looking at this more from the point of using the closing price instead of the high or low. If the next day closed below this price, then I would enter a short position at that close. At this point, you can use whatever trailing stop strategy you currently used to exit should price move contrary to your position B. This is the day that the +DI crossed up over the -DI signaling a possible buy. However, price did not close above this line before the ADX (green line on the DMI) dropped below both DI’s and eventually 20. Once this happens, a trend following indicator should not be used and signals that happen now I don’t act on. What has been suggested is that during this time, look for patterns in price and watch for price to breakout of this pattern. C. -DI again crosses up over +DI and with price closing below this line, a signal to enter short again is given 1. This is the first signal after (A) that indicates a correction may be happening. Once the TRIX crosses up over the HMA, that period’s close is used as the line to determine if the trade will be closed. If price closes above this line, then exit the trade. This is the case and the short position would have been exited 2. Because the trend is still down as indicated by the -DI being dominant, when the TRIX crosses down over the HMA, the close for that period is used to enter another short position. 3. Again, a signal is given to cover the short but in this case, price did not close over this close so the trade would not have been exited even though many periods went by 4. This time, the signal was hit to cover the short and again, due to the trend being down (-DI dominant), the signal was again triggered to re-enter a short position 5. Exit signal given and short was covered 6. This time, the sell signal to re-enter was not hit and price eventually entered a period of consolidation signaled by the ADX dropping below both DI’s and 20 7. NOTE: This is a important part of DMI/ADX that I use and will keep you out of a lot of churn in markets: When ADX drops below both DI’s and/or below 20, don’t use a trend following indicator to take trades. An option is to look for a price pattern (a channel, flag, a triangle, maybe a trend line) for price to consolidate into and then break out of. This consolidation should last for at least 5-7 periods or longer. Use the TRIX to potentially give a signal as to the direction of the breakout. In this case, the breakout was to the down side. Between (B) and (C), you see a pattern that happens in the DMI where there is a pullback. In these cases, one of the DI’s can become dominant for a briefly.
OANDA:SUGARUSDEducation
by mxb1961
A Strategy for Market Entry and Exit - Part 1This idea outlines a strategy for entering and exiting trades in a market using the DMI with ADX, TRIX with a HMA, and Stochastics. I use the indicators with the same parameters across all time frames. I've spent some time experimenting with the TRIX and HMA but have settled with 5 and 10. In some of the examples, you'll see 7 and 14 but for the most part they are similar in timing. Directional Movement Indicator (DMI) with Average Directional Movement Index (ADX) The DMI and ADX was developed by J. Welles Wilder and is fully documented in his book "New Concepts in Technical Trading Systems". Some high-level concepts of the DMI and ADX: Equilibrium Point - When the +/- DI are equal ADX - Is a measure of either up move or down move in a direction more that equilibrium point. A falling ADX indicates a weakening of the trend indicated by either the +/- DI An ADX that is below both +/-DI and/or 20 indicates no trend bassically and trend trading strategies should not be used If the ADX has crossed up over both DI's and has begun to drop, then the current trend may be slowing down and some covering should be done +DI crosses up over -DI long position should be considered (resistance->support) -DI crosses up over +DI short position should be considered (support->resistance) What I mean by resistance->support and support->resistance is that this event/trigger is important and the candle that is created now is either going to set a level of resistance that needs to be exceeded to take a long position or must be exceeded down for a short position to be taken. See more details below regarding the 'Extreme Point Rule'. Note: If the ADX is rising, is the DI in crossover incrementally increasing over time? The DI that crosses up over the other should continue to gradually increase in a possible zigzag as price moves in its direction. ADX Extreme Point Rule On the day that +DI and -DI cross, use the extreme price made that day as the reverse or entry point. Per Wilder: If you are long the reverse point is the low made on the day of crossing. If you are short, the reverse point is the high made on the day of the crossing. Stay with this point, if not stopped out, even if the indexes (+/- DI's) stay crossed contrary to your position for several days (assumes you're looking at a daily chart). I'm working through an alternate to this that uses the close for the day instead of the extreme of the day. When the +DI crosses up over the -DI, this period's close becomes an important event/trigger (resistance->support) line. It is resistance in that price must close up above this line to enter a long position. Once price does so, then the line will become support to watch for in the future. I let these lines flow from the candle out to the right for future reference. Over time, you may want to hide lines that are not close to price movement. Likewise, if the -DI crosses up over the +DI, then the close for that day becomes an important event/trigger (support->resistance) line. It is support because price has to close below this line to enter a short position. Once price does, then the line will become resistance as price moves back up eventually. I use the term day in places but it's the candle for that period. I think you can apply this strategy to 15m, 1hr, 4hr, daily, weekly, and monthly TRIX I use the TRIX in conjunction with the HMA to fine tune the entry and exit of trades (more info on TRIX can be found by a quick google search). This will be continued in a second post due to size constraints.
OANDA:SUGARUSDEducation
by mxb1961