Blog Home >> Strategy Talk


No information on this website should be considered a recommendation or solicitation to invest in or liquidate a particular security or type of security. Always do your own research and make your own trading decisions based on your situation and risk tolerance.  Investors should consider the additional unique risks of Options, ETFs, Mutual Funds and Margin Trading.

Search Blogs

Strategy Talk

If you're like most traders, you probably have a few "tools," or strategies, in your investing tool kit that you feel comfortable using most of the time. However, sometimes the market hits you with challenges that your limited tool kit is incapable of dealing with. At Learning Markets, we know how important it is to be flexible so you can react to whatever the market throws at you. That's why each week in our "Strategy Talk" blog, we will be introducing you to a new tool, or strategy, that you can put in your investing tool kit so you will be prepared to take advantage of whatever trading opportunities come your way.
|
Edit | Post

Using the ADX to Find the Beginning of a New Trend


Recently on a live, Friday-evening session of the Daily Market Commentary series, one attendee asked the question "How can you tell when a stock might be ready to break out of a sideways channel and begin an upward trend?" I thought about the answer to this question for quite a while afterward and decided that this topic deserved further discussion. 
 
Though there is no guarantee for being able to see the future through any technical indicator, there are certain indicators which can give worthwhile clues that may not be easily discernible to the human eye in a regular price chart.  The Average Directional Index (ADX) is one such indicator.
 
The ADX doesn’t give you a strategy for trading, implicitly, but rather a strategy that complements other trading strategies. If you are using any kind of a strategy that helps you identify trending trades (that is a trade that benefits from trending price action), then the ADX will help you to know whether the conditions are right for you to be taking the trade in the first place.
 
One simple rule for the ADX strategy is as follows: 
  • If the ADX level is above 20, consider looking for a trending trade
  • If the ADX is below 20, pass on the entry signal
This rule is a simplified form of using the ADX based on the writings of the man who developed it. Welles Wilder, a pioneering market technician, first described the indicator and its components in his book New Concepts in Technical Trading Systems back in 1978 when it was published. At that time, there were no computers to rapidly accomplish the calculations. It is interesting that even in this day of sophisticated technology, his work on this indicator remains as fresh as the day it was published.
 
The ADX attempts to aggregate subtle details of price movement over several time periods, minutes, hours, days or weeks (the number of periods is a variable setting). In particular it looks to gauge how much price movement is occurring beyond an average range of activity and which direction it seems to be moving. Within this calculation, some very interesting, and timely, observations can be discerned; namely, the build-up of a stock within a channel as it prepares to break out into a new trend.
 
Consider the example of Yahoo (YHOO) in the figure below. Not all stocks make such a clear example, but here you can see how it was that in the midst of YHOO’s year-long sideways range between $14.50 and $16.25, the ADX moved above 20 and made a definite upward trending move signaling the possibility of a breakout to come.

YHOO – ADX trend precedes a breakout from channel
 
Seeing this movement on YHOO's ADX could have given you the added confirmation you were looking for when deciding whether or not to en

This is a very simple example with more detail than I can effectively explain in this brief blog post. If the idea behind this indicator in interesting to you, attend the Strategy Session to be held this coming Thursday (January 24th) at 8 p.m. Eastern time, where we will have an in-depth discussion on the ADX.

To register, log in to Scottrade.com, click on the Knowledge Center tab, click on the Strategy & Commentary link in the left navigation and then click on the ADX Strategy Session link.
 
-- By Gordon Scott, CMT, Learning Markets Analyst.
 

Posted by learningmarkets on Jan 22, 2013 3:37 PM CST



The information presented or discussed in the Scottrade® Community is not, and should not be considered, a recommendation, offer or solicitation of an offer to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.  You are fully responsible for your investment decisions.  Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives.  Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.  Content posted on the Scottrade® Community may include blog entries, posts or links to information and content created by third parties not employed by or affiliated with Scottrade, where such third parties receive compensation for the creation of such entries, posts, information or other content.  Such third-party content has not been adopted, endorsed or approved by Scottrade or its affiliates.



Brokerage Products and Services offered by Scottrade, Inc. - Member FINRA and SIPC.

*Online market and limit stock trades are just $7 for stocks priced $1 and above.

Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security.

The information presented or discussed in the Scottrade® Community is not, and should not be considered, a recommendation, offer or solicitation of an offer to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.  You are fully responsible for your investment decisions.  Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives.  Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.  Content posted on the Scottrade® Community may include blog entries, posts or links to information and content created by third parties not employed by or affiliated with Scottrade, where such third parties receive compensation for the creation of such entries, posts, information or other content.  Such third-party content has not been adopted, endorsed or approved by Scottrade or its affiliates.

Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. A mutual fund's prospectus contains this and other information about the mutual fund. Prospectuses are available through our trading site or through a Scottrade branch office. The prospectus should be read carefully before investing. No transaction fee (NTF) funds are subject to the terms and conditions of the NTF funds program. Scottrade is compensated by the funds participating in the NTF program through recordkeeping, shareholder, or SEC 12b-1 fees.

Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for long-term investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.

Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. The Margin Disclosure Statement and Agreement (PDF) is available for download, or it is available at one of our branch offices. It contains information on our lending policies, interest charges, and the risks associated with margin accounts.

Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the ScottradeOptions Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Supporting documentation for any claims will be supplied upon request.

Market volatility, volume, and system availability may impact account access and trade execution.

Testimonials may not be representative of the experience of other clients and are no guarantee of future performance or success.

© 2012 Scottrade. All Rights Reserved