Trading Power
Trends with ADX
By Dr. Charles B. Schaap, Jr.
International Traders Expo New York City
18 February 2014
Disclaimer
The information in this lecture is for educational purposes. No
particular stocks, futures, mutual funds, or exchange traded funds are
being recommended. Consult professional investment advice prior to
implementing an investment program. Past results are not
necessarily indicative of future results. Do not invest with money you
cannot afford to lose. Investing involves potential risks. Trading
involves risk, and It should not be assumed that methods taught will
not result in losses.
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eTraders Expo
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Power Trend
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Indicators
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Power Trend Trading Principles
Trends are created and fueled by big
institutional investments companies (hedge
funds, mutual funds, banks, etc.)
BIGs = big institutional guns
The 50-week moving average generally reflects
long-term, institutional buying activity
Use the 50 EMA WEEKLY for Long-term Direction
Use the 50 EMA DAILY for entry
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Power Trend Trading Principles
The goal is to enter as early as possible at the
start of the stocks trend
Breakout from a bottom formation/trend reversal
The FIRST pullback to the daily 50 EMA
The best trends begin out of general market
bottoms or market corrections
The best trends begin out of LOW ADX periods
Let profits run until there are signs of trend
weakness (ADX peak near 25)
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Power Trend Thinking
Follow price. If you cant read price,
indicators wont help you.
Ignore opinions
Ignore upgrades and downgrades
Ignore analyst predictions
Ignore news hype
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Moving Averages
Pullbacks to a moving average represent
reversion to the mean price
Moving averages act as areas of support for
countertrend retracements (pullbacks) and
consolidations
Moving averages correlate to the degree of trend
Daily 10 MA or 20 MA: short-term trend
Daily 50 MA or 100 MA: Intermediate-term trend
Daily 200 MA or 250 MA: Long-term trend
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Power Trend Volume
High volume is an indication of institutional
buying/selling
DMI is highly correlated with volume
Most Important:
Volume greater than the previous days volume
Volume greater than the 50-day volume average
Volume increase of 150% above is key for breakouts
and gaps
Watch for volume strength that correlates to DMI
entry signals
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Four Stages of the Stock Cycle
DISTRIBUTION
MARKDOWN--SHORT
MARKUP--LONG
ACCUMULATION
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Stock Cycle Lessons
Profits (long) are only made in the markup stage
Even the strongest performing stocks eventually go
through markdown, usually during a general
market decline
Most of the stocks that undergo markdown, never
recover
Newer stocks emerge in the next bull economic
cycle
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DMI
(Directional Movement Indicator)
DMI represents price direction.
When +DMI is above DMI, the price direction is up.
When DMI is above +DMI, the price direction is
down.
DMI measures the strength of price swing highs
and lows on a scale of 0-100.
DMI is used for trade entry and exit signals.
Note: DMI crosses alone are never used for
entries or exits.
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Directional Movement (DM)
DM is the largest part of todays range that is
outside of yesterdays range.
When the largest part of todays range is
above yesterdays range, we get positive DM
(+DM).
When the largest part of todays range is
below yesterdays range, we get negative DM
(-DM).
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Directional Movement (DM) Concept
+DM
+DM
NO DM
-DM
-DM
Note: For each bar, only one (the largest) DMI value is
used; on an inside day, both values are recorded as 0.
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Correlation of DMI to Price
The +DMI moves in the direction of price.
When price rises, +DMI rises.
When price falls, +DMI falls.
The DMI moves counterdirectional to price.
When price rises, -DMI falls.
When price falls, -DMI rises.
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DMI Strength (Highs)
DMI High < 15 = Very Weak
DMI High 15-25 = Weak
DMI High > 25 = Strong
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Bulls vs Bears
The two DMI lines allow the trader to
independently gauge the relative strength of
the bulls and bears.
The +DMI is the strength of the bulls.
The DMI is the strength of the bears.
Relative DMI strength is important for seeing
DMI Dominance, a key directional signal.
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ADX/DMI Indicator
New Concepts in Technical Trading Systems, 1978 (Wilder).
Average Directional Movement Index (ADX) was developed by
J. Welles Wilder
ADX is derived from two related indicators, the Positive
Directional Movement Indicator (+DMI) and the Negative
Directional Movement Indicator (-DMI).
Default periods for ADX and DMI is 14
ADXcellencePower Trend Strategies, 2006 (Schaap)
ADXcellence settings: DMI 13, ADX 8
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ADX and Trend Strength
ADX is Nondirectional
ADX quantifies trend strength
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ADX 50 : Very Strong (Power Trend)
ADX 25-50: Strong Trend
ADX 15-25: Weak or No Trend
ADX 15: No trend (Prebreakout)
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ADX is Nondirectional
ADX measures the strength of a trend, but
doesnt distinguish between uptrends and
downtrends.
When there is a strong uptrend, ADX rises.
When there is a strong downtrend, ADX rises.
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ADX
Strong ADX waves represent periods of
institutional buying
ADX measures the difference between the
+DMI and the DMI.
ADX rises when the DMI lines diverge.
ADX falls when the DMI lines converge
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ADX Wave
Getting Stronger
Getting Less Strong
STRONG
25
WEAK
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ADXcellent Benefits
ADX distinguishes between trending and
nontrending conditions.
By quantifying trend strength, ADX allows the
trader to choose only the strongest trends to
trade.
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Trend Momentum
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ADX
Power Trend Rule
ADX power trends have one or more ADX
peaks of 50 or greater and one or more
ADX troughs greater than 25.
ADXcellencePower Trends
Power trends are preceded by a consolidation
period (>30 bars) where ADX is below 25.
ADX usually hits peaks of 50 and retracement
troughs often remain above 25.
Price remains above the 20 EMA the majority
of the time.
Trends tend to look overextendedwe think
its too late to enter.
Power trends allow traders to let profits run.
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Strong ADX
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Weak ADX
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ADXodus Trade Setup
30 bars of low ADX range consolidation
ADX < 25
DMI lines are above ADX, moving sideways
LONG: +DMI makes a Crossover High Signal
Entry
Buy Breakout on resistance line cross
Or Enter on 1st pullback near 20 EMA on pivot low
completion
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ProSelect Stock Service
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IPO 2011, makes radios, antennas and network mgmt tools
Qtrly Sales % chg 85%, 3 Yr Sales growth 34%, Qtry EPS change 140%
IPO 2011, Chinese provider of internet security, browsers, online games
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IPO 2013, internet products and applications, focus android smartphones
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Contact Information
Dr. Charles B. Schaap
Website: TradeLikeAPro.com
Email: [email protected]
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Thanks for Attending!
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