Emini Trading Blog

Posts Tagged ‘eminis’

One of the most effective and reliable of the technical indicators for trading e-minis can be the Average Directional Indicator or ADX. Used correctly the ADX can be a stunningly accurate gauge of market trend strength or weakness and coupled with a complementary indicator, can be very effective in setting up trades using the e-minis.

The ADX was created by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems. Interestingly Wilder, an engineer, is also credited with creating two other well-known technical indicators, the Relative Strength Indicator (RSI) and the Parabolic SAR which are standard indicators in most charting software packages today.

The ADX is made up of three components, the ADX and +DI/-DI. +DI is the positive directional movement indicator while -DI is the negative directional movement indicator. These two indicators are often plotted separately from the ADX to minimize visual clutter. They are designed to indicate the upward or downward (strength/weakness) of trends.

The directional indicators are capable of generating buy and sell signals when they cross. Basically, a buy signal is present when the +DI moves above the -DI and a sell signal is present when the -DI moves above the +DI. However, in volatile market conditions or when issues are in trading ranges, these signals can reverse rapidly resulting in whipsaws. It’s generally accepted that the directional indicators alone are not reliable buy/sell indicators.

The third component of Wilder’s indicator is the ADX. The ADX is an oscillator plotted on a 0-100 scale. The ADX itself is the moving average of the difference between the +DI and the -DI. Readings above 60 are rare, while a reading above 30 indicates a strong trend. Readings below 20 indicate a weak trend or an issue in a trading range. Keep in mind that the ADX is “trend neutral”; its reading can apply to bull or bear trends – the ADX merely indicates the strength of the trend. Generally speaking, when the ADX begins to rise above 20, a trend may be in its early stages. Conversely, when the ADX begins to fall below 40, the current strong trend may be weakening.

Wilder himself in his book advises that the ADX is best used in more volatile market conditions. He also advocates use of what he calls the “extreme point rule” when implementing trades. For use in the E-Mini issues the ADX provides excellent results when used with a complementary indicator such as moving averages. The ADX is also a useful tool for setting up scans for issues in the beginning stages of trends and to avoid issues mired in trading ranges.

While seeking the presidency of the U.S. in 1991, H. Ross Perot said you can’t solve a problem until you agree on what it is. Oftentimes to reach such an agreement means we must have humility and sincerity to spare. As traders, what do large losses indicate? These are symptoms of one or more problems that we must solve in order to reach, not the White House, rather trading excellence.

When facing catastrophic loss, recovery can ensue by doing two things. The first is we must isolate the problem. Secondly, we must have expert guidance while first applying the solution. Let’s begin by learning how to isolate our problem then look at three sources of expert guidance.

Isolating the problem begins with reviewing our downfall trade(s).  Why did we enter? How did we manage our position? Why did we exit where we did? Do the answers highlight that we did not follow our trade strategy, that it is seriously flawed or that we lack one (hint: a hunch is no strategy)? By taking notes one step at a time, a remarkably clear picture will emerge. To be certain the picture is trustworthy answer forthrightly with honesty. What if after completing the exercise we do not like the picture? Remember, humbly working with what is is the most direct route to progress. A concise understanding of the problem equals a clear path.

An invaluable aid while on such a path is expert guidance. Recently, a struggling trader told me “I just need to be around someone successful at trading”. While that seems assuring, more is needed to recover. Once we and the facts agree on our problem, what is most beneficial is expert guidance as to the application of the solution(s). How is this obtained? Three principal means are books, interactive online screen-sharing with a qualified mentor and face-to-face instruction. What is paramount is that these directly dispense the solution(s) to our problem specifically.        

As is the case in most professions, to be competent and then excel at day-trading, there are numerous tools and accompanying skill-sets that we need to master. Beware of the “magic bullet” salespeople teeming in every available medium. While there are relatively few concepts that work to keep you on the right side of the trade, there are too many variables to allow for the famous “set it and forget it” mentality.  

It takes strength to persevere after experiencing the pain of a catastrophic loss. That you are demonstrating this strength is good since success in trading regularly calls on our ability to cope with losses and requires we adapt our strategy to market conditions. So, avoid the trap of ignoring the symptoms. Gather the facts by completing the exercise above. Then with an open-mind agree on the problem. Lastly, apply the solution with guidance from an expert. Oh, one other thing we can learn from Mr. Perot is, don’t stop just to start again, since it will likely impede your progress.