[trade-samarai]

//ADX-Mod (Format type as point and weight from 3 to 5 as desired to look as pictured.)

inputs:
Length( 14 ) ;
inputs: UpColor(green), DnColor(Red);
variables:
ADXValue( 0 ), Color (0) ;

ADXValue = ADX( Length ) ;

if ADXValue < 20 then
color = UpColor
else
color = DnColor;

plot1(0,"ADX-Mod",color);

[Frank]

Lets take a look at todays S&P chart. I like the 5-min chart for watching ADX as its not TOO low a timeframe but certainly not too high either.

So the bigger idea is the high-low price channel. When the channel forms a V, ADX drops. When the channel forms an /\ (inverted V), ADX also drops....

Once the channel begins to change directions, you can watch the highs and lows of the bars for help. Note how price attempted down but no lower high pattern formed. Eventually, the channel formed a V and ADX continued to stay low. Just as the high end of the channel began up --- again, the lows could not hold --- so ADX would be expected to stay low. But then note what happens next, the highs of the bars begin to consistently make lower highs as the low end of the channel is taken out.

So there are 2 equally important things going on here -- there is the channel and there are the individual price bars. Then you also have the consideration of where the absolute level of ADX is.... if ADX is very low already, it will begin to expand as the channel begins to extend. If ADX is already high, it matters where price came from --- if the channel was down but highs are getting taken out consistently, then ADX will drop because the channel is not extending.

To some extent, you can think of the individual price bars as the lower timeframe and the channel as the higher timeframe -- a good trade needs to incorporate both timeframes.

First look at just the chart without the ADX indicator in the lower pane and try to visualize what is going on with the indicator (ADX is slow indicator --- it lags a bit -- so this is a good exercise):

[Frank]

Here is the same chart with the ADX indicator in the lower pane.

At Point A, the channel starts lower. But as it does this, the next 5-min bar is green and the low is not taken out. You can see that this green price bar is not going to help ADX get going as we know ADX moves only when a pattern of lower highs and lower lows ensues. The next bar makes a higher high and higher low to the last bar. Obviously, this bar is going to begin to erase the effect of the attempt lower.

Then the lower end of the channel turns up. Then the high end of the channel turns up --- so the overall channel has now formed a 'V'... The V pattern makes ADX go down. (If ADX is already very low, ADX may just stay at very low level).

Next the upper end of channel turns up at Point B. Thus you begin to again watch highs and lows. Once again, the price bars cannot get going and this leads to another reversal.

At Point C, you can see how something new happens --- the highs of the bars are not being exceeded while the lows are. The lower timeframe is signalling sell pressure. ADX eventually responds as the channel turns down while lower highs and lower lows continue.

[thalestrader]

Originally Posted by Frank »

Lets take a look at todays S&P chart. I like the 5-min chart ... First look at just the chart without the ADX indicator in the lower pane and try to visualize what is going on with the indicator (ADX is slow indicator --- it lags a bit -- so this is a good exercise

Originally Posted by Frank »

Here is the same chart with the ADX indicator in the lower pane ... ADX eventually responds as the channel turns down while lower highs and lower lows continue.

Hi Frank,

Thank you for sharing you expertise concerning the ADX.

I have a question, or rather a group of questions: How do you trade based upon the information you are focusing upon? Where did you enter? Where do you place your stop(s)? When do you get out?

Respectfully,

Thales

[Tams]

Originally Posted by Frank »

Here is the same chart with the ADX indicator in the lower pane....

Thanks for the illustrations and explanations ...

An indicator is only good/useful if you understand its operations.
This is good description.

[thalestrader]

I thought Tams was Happy ... what happened?

[Tams]

Originally Posted by thalestrader »

I thought Tams was Happy ... what happened?

I am obliviously happy. ;-)

[Frank]

Hi Thales,

Actually, I am on vacation this week and was just looking at the chart after a day at the beach --- I will be the first to tell you that after the fact analysis is always easy compared to real-time trading. I am not saying this is so obvious and that I would have caught an entry even if I had been focused today as I may not have -- but one thing I can say is that I would have been 'looking' on short-side given this price action.

In general though, with a low adx situation I would be looking at 2 types of entries ----

1) enter on a sell stop and look for near immediate continuation. you want to see price continue through your entry price for a bit so you have some room -- if don't get continuation, you are often better off exiting out for small loss and re-evaluating. if it does go in your favor after your stop, you should try to stay with it by giving it some room room but not too much as you do not expect a 5-min high to be exceeded by much. in that situation, one idea is to default to a stop that is 3 ticks above the 5-min bar high. if the ADX coil is breaking, that stop should not get hit.

2) the other entry is to try to to catch a 'lower high' -- ie, the channel may need to fill out a little more b/c sometimes the main channel has turned but there is some testing action back up that holds the channel-high but still violates some 5-min highs. in this situation you want to see price test up and then find a price and go with it. sometimes I will start with smaller position and add only when I see selling pressure resume. again, defaulting to a stop 3 ticks above a 5-min bar.

the best thing about catching ADX moving from low ADX to high ADX is that you when you catch it, you generally get a 'direct move' --- where your stop will never be threatened. then you can scalp out of a piece and just maintain a tight stop and now in a no-lose situation.

today, it looks like the only way to enter was to use Method 1 or get caught chasing. sometimes there will also be other types of things you notice that tip you off --- like if NQ or DAX break hard first. or if you see a large NYSE ticks reading and can catch first retracement back to +300. because I wasn't watching all this in real-time, tough to say.

one note of caution -- try not to be trading both sides of a coil. ie, if you had a short bias today, you could wait for the action that goes with that bias --- sometimes the coil gets sloppy (wide and loose) and this is very difficult situation. today, the range was very narrow so this doesn't apply --- but sometimes you get a wider coil and you have to be careful not to be going long at high side of a trading range and short at the low end of the range. overtrading a range can be account killer.