Here we go. The postings for the coming weeks are all related to the subjects/tools that I am studying and implementing into my trading plan.
The first thing I need to know before I start a trading day is to evaluate if I am potentially facing a trending day or another choppy one.
There are different strategies for different types of market conditions. It is the most frustrating when getting chopped out by the market. I had tons of this kinda experience in dummy trading. The main reason? I was bowling in a tennis court, I hurt my arm and damage the court.
Two tools caught my attention. Average Directional Index and Guppy Multiple Moving averages.
I am looking at a longer time frame for this purpose. For example, if I were to trade off a 15-min chart, I will be looking at 10 times of 15-min which is approximately a 120-min chart to evaluate the trend.
The idea is to see a bigger picture. I would layout a 120-min chart with 200 SMA and ADX (Average direction index). I am not interested in the ups and downs of 200 SMA. Instead, I am focusing on the slope of it. I am ONLY looking for Long if it is sloping up, and Short if it is sloping down.
That’s not all. I start looking at ADX.
One major function of ADX is to determine if a futures/stock should be traded with a trend-following or non-trend-following system.
Right tools at the right time, give you the ‘right’ result.
ADX does not generate buy/sell signal for me. Instead, it is showing me the strength of a trend. This is the key point.
When ADX is below 20, it shows a lack of a clear trend. So, trend-following systems will face some whipsaws here and there. On the other hand, when ADX is rising and crosses above 20, it shows a trend is building up and gaining strength.
So, be happy, dummy traders. Some said when ADX falls from 40, it is showing a trend is pausing and steps into the consolidation phase.
In addition to the ADX, I browsed through my library last night. ‘Trend Trading’ by Dalry Guppy again caught my eyes. Mr.Guppy introduced Guppy Multiple Moving averages(GMMA). TraderMike wrote about GMMA before. It is used to view the nature and characters of a trend. It not so much of helping to make any decision, it does give me a feel and insight into the trend.
I have done some simple programming to display GMMA in Tradestation.
Some people are sharp enough to look at the chart and shout “It is trending”. I am not. I need some forms of analysis and tools to help. But, anyway, the point here is to make sure I am trading the right strategy in the right market condition.
Coming soon.. I am looking at Candy sticks…Oops…I mean Candlesticks…
Here are some ideas and readings I have found on the internet.
- Trend or Range? You Better Know the difference [pdf]
- Make The Trend Your Friend In Forex
- John Murphy’s Ten Laws of Technical Trading
- TraderFeed: Why It’s So Difficult To Be A Trend Follower
- The Trading Tribe – Trend