- 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 over would indicate a level to short
- Divergence can happen in both DMI and to indicate a weakening trend. With the , it can be a negative divergence where price makes new lows but makes higher lows or positive divergence where price is making a new low but 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 crossed up over the 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 crossed up over the signaling a possible buy. However, price did not close above this line before the (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. again crosses up over 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 crosses up over the , 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 being dominant, when the crosses down over the , 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 ( 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 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 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 ) for price to consolidate into and then break out of. This consolidation should last for at least 5-7 periods or longer. Use the 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.