ADX for Explosive Moves

Its not only what to do which plays a important role but also one should know what not to do.

In stronger markets like we saw in the last 2 years the oscillators like Stock and RSI on Higher Time Frames usually get stuck at the above levels.

While the ADX of higher time frames is at its strongest. The oscillators on lower times frames move down wards to give a breathing space to the stock.

While this happens the ADX on weekly is above 30-35 levels and turns a bit down than last week. This is Direction Change which is negative.

This Negative Direction change might be temporary or permanent. But while the higher time frame is still strong and the lower time frames again get moving up you would see the weekly ADX turning up again. A "u" turn up which can be called as a new up which can be Moderate New up or Strong New Up.

Such moves in strong markets can give explosive break outs.

Price Patterns

AB = CD Secret Pattern

Multiple Time Frames

Robert Krausz's Multiple Time Frames

"Although multiple time frame techniques have become more visible, the most robust approach has been taken by Robert Krausz. To understand the importance of first arriving at a sound theory before implementing and testing a trading program, we need to briefly review the characteristics of performance that indicate a robust method.When testing a trend-following system, we should expect that a trend of 100 days, compared with a trend of 50 days, will produce greater consistency, greater reliability, and proportionally fewer trades. 

As you increase the calculation period, this pattern continues; when you reduce the calculation period this pattern reverses. You are prevented from using very short calculation intervals because slippage and commissions become too large; the longest periods are undesirable because of large equity swings. 

There must be a clear, profitable pattern when plotting returns per trade versus the average holding period.The sophistication in Krausz's work lies in his understanding of this pattern, and its incorporation into the structure of his program, The Fibonacci Trader. Krausz works in three time frames rather than two. Each time frame has a logical purpose and is said to be modeled after Gann's concept that the markets are essentially geometric. 

The shortest time frame is the one in which you will trade, in addition, there are two longer time frames to put each one into proper perspective.The patterns common to time frames are easily compared with fractals; within each time frame is another time frame with very similar patterns, reacting in much the same way. 

You cannot have an hourly chart without a 15-minute chart, because the longer time period is composed of shorter periods; and, if the geometry holds, then characteristics that work in one time frame, such as support and resistance, should work in shorter and longer time frames. Within each time frame there are unique levels of support and resistance; when they converge, increasing stability. In Krausz's work, the relationships between price levels and profit targets are woven with Fibonacci ratios and the principles of Gann.

One primary advantage of using multiple time frames is that you can see a pattern develop sooner. A trend that appears on a weekly chart could have been seen first on the daily chart. The same logic follows for other chart formations. 

Similarly, the application of patterns, such as support and resistance, is the same within each time frame. When a support line appears at about the same level in hourly, daily, and weekly charts, it gains importance.

As a well know trader, Krausz brings more than just three time frames and some unique strategies to the display screen. He endows the program with six rules:

LAWS OF MULTIPLE TIME FRAMES

1. Every time frame has its own structure.

2. The higher time frames overrule the lower time frames.

3. Prices in the lower time frame structure tend to respect the energy points of the higher time frame structure.

4. The energy points of support/resistance created by the higher time frame's vibration (prices) can be validated by the action of lower time periods.

5. The trend created by the next time period enables us to define the tradable trend.

6. What appears to be chaos in one time period can be order in another time period.

MACD ADX Strategy

                     

The MACD and the ADX are the most powerful indicators. But the most important fact of stock markets is to bypass false signals and false breakouts. Various parameters have to be combined to take the right pick at the right time in direction of the trend.

Here is a simple MACD ADX strategy that can be opted to trade.

Buy Strategy

1. MACD Zero Cross Up and

2. +DI should be greater than -DI

or

1. If  MACD is above Zero then wait for +DI and -DI positive cross overs to happen. But an early entry can be made if at this point the ADX is above both DI's and had just turned down signalling a change in  current trend.  

Sell Strategy

1. MACD Zero Cross Down

2. -DI should be greater than +DI

or 

1. If  MACD is below Zero then wait for +DI and -DI negative cross overs to happen. But an early entry can be made if at this point the ADX is above both DI's and had just turned down signalling a change in current trend.  

Other precautions to be taken are :

1. Watch the price levels with respect to Bollinger Bands. If a positive trend is seen in formation and the prices are at lower Bollinger Band then keep a target of middle Bollinger Band. Similarly if prices are at middle Bollinger Band then keep a target of upper bollinger band.

2. Watch the Prices at crucial EMA crossing like the 200 Day EMA.

3. Watch the Herrick Payoff Index which is a combination of Volumes and Open Interest can be used as a yardstick.


4. If prices are in uptrend for a long time with the MACD above zero for a longer period and there is a DI Positive Cross then, its better to do a very detailed analysis before entering into the stock.

5. Use your favorite MACD and ADX values and do proper back testing for various ADX and MACD values and then set the best suited for your markets.


Please Feel Free to post your comments.

Power Of Combining Indicators

Here's what suddenly struck me while analyzing charts.

Before going ahead with what I noticed let me revise the indicators.

For newbies the MACD and ADX are trend indicators while RSI and ROC are major oscillators.

The crucial levels of MACD are zero cross up and down. Turn up and Turn down below and above d center line respectively.

The ADX crucial levels are ADX rising from 18 towards 20. The DI crossovers and Major strength with ADX above 30 and greater than both DI's takes a down turn.

The RSI crucial levels are 30, 50 and 70 crossovers.

The ROC major levels are zero crossovers.

Well after have refreshed these indicators lets begin with what I could analyse for which I have put in some random samples of various charts in different time frames.

The ROC and MACD crossing zero levels simultaneously in either direction with the RSI marching in the same direction and ADX poised for a change in trend or forming a strength in the same direction creates a momentum to push the stock.

This is just a basic raw ground work. The technical stalwarts like Prachi Selvan Karthik Marar Archana Mankar Wave Rider Muni Prasad Gutha and others can further explore this and can take it further to newer and more quantifiable and result oriented levels.


The charts posted are of Indian Stock Markets nevertheless the ideas can be grasped and grown upon and utilized by any stock markets.


NB : Prachi Selvan, Karthik Marar, Archana Mankar, Wave Rider, Muni Prasad Gutha are all available on FACEBOOK

Methods to Detect Divergences

Divergences are a bit difficult to programme. Divergences are best checked visually.

There are many different ways to check for divergences.

1. One of the simplest is to use Rate of change indicator and EXPLORATION feature of Automatic Analysis window.

// 5 day rate of change of closePriceUp = ROC( C, 5 ) > 0 ; // 5 day rate of change of MACD histogramMacdUP = ROC( MACD() - Signal(), 5 ) > 0; BullishDiv = NOT PriceUP AND MACDUp;BearishDiv = PriceUP AND NOT MACDUp;Filter = BullishDiv OR BearishDiv;AddColumn( BullishDiv, "Bullish Divergence", 1.0,
       colorDefault, IIf(BullishDiv, colorGreen, colorDefault ) );
AddColumn( BearishDiv , "Bearish Divergence", 1.0,
       colorDefault, IIf(BearishDiv , colorRed, colorDefault) );



2. Using linear regression  

// 10 day linear regression slope of closePriceUp = LinRegSlope( C, 10 ) > 0 ; // 10 day linear regression slope of MACD histogramMacdUP = LinRegSlope( MACD() - Signal(), 10 ); 


The divergences can be applied to any oscillators for any specific values. 

Key Options Strategies - Long Call : Short Call

Herrick Payoff Index - Part 1

Intraday trading, or day-trading, must be approached with extreme caution and preparation. It takes research and the application of thorough studies to be fully prepared to jump into the volatile water of intraday price movements. It may seem like simple advice, but a trader must know what indicators to trade with and have a full understanding of how they are derived and applied. If you go in without a plan or too many analysis tools, you’re asking for failure. 

Too many beginners attempt daytrading after asking an unsuccessful long-term trade. They think that somehow being forced to enter and exit the market over short duration will be easier or more rewarding. Many beginners do not take into account that intraday trading takes a greater emotional toll than other trading strategies. While the instant ratification and knowledge that at the end of the day you are “flat” is intuitively pleasing to many traders, as a day-trader you are constantly challenged, every second of the day, with making decisions on researched criteria. A day-trader must create and test a viable system based on chosen and understood indicators. 

A day-trader must have a predetermined market direction from prior research and always use protective stops, or as some prefer, price brackets. This is where tools such as the Herrick Payoff Index (HPI) come into play. The HPI measures trend strength and money fluctuation by analyzing the main components that make up the market (volume, open interest and price). HPI looks to capture the mean prices that are distributed daily. These mean prices mostly are significant points in the market. Significant points are where a trader would find large amounts of volume, open interest and money flow. To understand the HPI, and before we get to calculating the indicator, a trader needs to have a full understanding of volume and open interest. These are the main components that build the indicator. 

Volume and open interest have always been, and will always be, two of the most used but most misunderstood market terms. Volume is the total number of contracts traded at a particular point in time. Whether the trader chooses seconds, minutes or days is irrelevant. HPI looks to break volume up based on the percentage of contracts traded at a particular price. By analyzing this data a trader gets an understanding of where the market is most indecisive, which most likely will be a significant point. 

Volume increases on rallies and decreases on declines in a bull market. Volume increases on declines and decreases on rallies in a bear market. Also, traders will find volume increasing at the breakout points of a trading range. 

Open interest represents the number of outstanding contracts at a particular point in time. A trader can also get a grasp of a market’s liquidity by looking at the amount of open interest and potentially avoid low volume time periods or entire markets to reduce major slippage. 

Open interest usually increases as commercial interest enters the market and commences short selling. Most professional traders will agree that the smart money is always going to be the commercials and by analyzing open interest a trader can look to capture profits from the movement of the market caused by the commercials. 

Traditionally, traders have used the following rules for volume and open interest analysis: 

• If prices are up and volume and open interest are rising, the market is bullish. 

• If prices are up and volume and open interest are declining, the market is bearish. 

• If prices are down and volume and open interest are rising, the market is bearish. 

• If prices are down and volume and open interest are declining, the market is bullish. 

Herrick Payoff Index (HPI) was developed by John Herrick. The HPI is an excellent short- and long-term tool. HPI is simply a mathematical method of measuring the money flowing in or out of a commodity by computing the difference in dollar volume each day. The formula, is: 

HPI = Ky + ( K - Ky )/ 100000 , where: 

where Ky = yesterday's HPI, 

S = user-entered smoothing factor (0.1 standard), 

y = yesterday's value, and 

K = CV (M – My) (1± 21/G) 

The ± sign in the right bracket of the formula is + if M (mean price) > My (yesterday's mean price); if M 

< My, it is –. 

M =high+low/2, 

C = value of one cent move, V = volume, I = the absolute value of today's open interest minus yesterday's open interest, and G = today's open interest or yesterday's open interest, whichever is greater. 

The Herrick Payoff index is based off a zero line indicating a neutral position. Anything above the zero line or a positive number would indicate an upward trend or a bullish market. Anything below the zero line or a negative number would indicate a downward trend or a bearish market.

Bollinger Bands - Summary

Bollinger Bands was developed by John Bollinger. It allows users to compare volatility and relative price levels over a period of time. Bollinger Bands are envelopes surrounding the price candles on the chart. They are plotted two standard deviations away from simple moving average. Standard Deviation being a measure of volatility the bands adjusts themselves to ongoing market conditions.

They widen during volatile markets and contract during less volatile periods.

Three Primary Uses of Bollinger Bands are

Pattern recognition

Recognize double tops, head and shoulders, double bottoms

Reversal signals

Identify early warning signs of reversals

Trend analysis

Detect trend continuation and conclusion

Concepts of Bollinger Bands

• Tags of bands are not necessarily buy/sell signals

• Closes outside BBs can be continuation signals if confirmed by other indicators

• Contraction (The Squeeze) is followed by Expansion, is followed by Contraction….

• BBs are based on a simple moving average. Default is 20 period MA with 2 standard deviations.

• Default contains 95% of price action

• Works well on most time frames

• Longer term: 50 periods MA, 2.1 std. deviation.

• Shorter term: 10 periods MA, 1.9 std. deviation.

• A Bollinger Band doesn’t give buy/ sell signals. Use Bollinger Bands with other indicators for confirmations

 Remember…your first priority is always to conserve your capital!

ADX - The Most Beautiful Indicator

The ADX is one of the most beautiful indicators developed by J Welles Wilder, Jr.

After a crossover of the DI lines, when the ADX starts moving up a trend is formed.

If DI + is above DI- then a positive trend is in place and vice verse if DI- is above DI+ then the negative trend is strong.

At times when any of the trend is strong the ADX line rises above the +DI and –DI . The trend is strong.

At some point this ADX turns down.  As per J Welles Wilder, Jr  when this occurs it is seldom bad time to take some profits and then reentering in the direction of the major trend. Or wait for a cross over of the DI before making an entry again.

If the ADX line turns up again it signifies of the major trend still in place and it’s a rip roaring bull/bear market.

A very simple strategy but has to be used with utmost care.

Hidden Divergences

Most technical indicators mirror or confirm price movement.

When price moves up, the indicator moves up; when price moves down, the indicator moves down.

Sometimes, however, a discrepancy occurs between price and indicator movement.

This discrepancy is known as non-confirmation and can be seen most clearly on overbought or oversold indicators as well as on indicators that move above or below a zero line.

Hidden divergences are the opposite of classic divergences.

Classic divergences looks for

• Lower low prices accompanied by higher indicator values at price  bottoms.
• Higher high prices accompanied by lower indicator values at price tops. 

Hidden divergences, on the other hand, seek

•  Higher price lows accompanied by lower indicator values during up moves
• Lower price highs accompanied by higher indicator values during down moves

Most hidden divergences signal continuation moves in the direction of the prevailing trend.

Chart with Bullish Hidden Divergence Formation

 Chart with Bullish Hidden Divergence Formation

Chart with Hidden and Classic Divergences

Candlesticks

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