| CHART 1: JUMP IN AND HANG ON FOR
THE RIDE. If you are an aggressive trader and entered
a long position at Point A, and only exited your
position at Point C, you would be pleased with the
results. This can be achieved with a few simple
indicators. |
Let's look at recent long-term trend (chart 1) and
put trendline analysis together with the DMI system
to illustrate the utility of these tools when used in
conjunction with each other. An aggressive trader might
initiate a long position as the daily resistance line
is breached on 11/12/03 (point A). A trader looking
for confirmation might wait a day, when the DI+ crosses
up through the DI- line, generating a buy signal. A
conservative trader might wait for confirmation of the
DI+/- crossover by waiting for the extreme point (high)
to be exceeded, in line with Wilder's extreme point
rule. This confirmation is given the following day (11/14/03).
As the market begins to move higher, the support trendline
drawn off the lows is tested, but holds, underscoring
its validity to a nascent trend. Although the market
has moved higher in line with the DI+/DI- crossover
and trendline support, the ADX is still below 25 until
12/2/03 (point B), when a trend is finally confirmed.
At this point, a trader should recognize that they are
in a trending market and trend following systems can
usefully be employed. This brings us to the point of
introducing some additional tools that can be used to
maximize profit within a trending market. We have already
suggested using the ADX as an early indicator of the
end of a trend. Note that from point B, when it first
registers above 25 indicating a trending market, the
ADX continues to make new highs until 01/14/04 (point
C) when it closes lower signaling a likely end to the
uptrend and that it's time to exit the long position.
A second tool used to identify an exit point and possibly
the end of a trend is the parabolic indicator. The parabolic
indicator follows the price action but accelerates its
own rate of increase over time and in response to the
trend. The result is that the parabolic is continually
closing in on the price, and only a steadily accelerating
price rise (the essence of a trend) will prevent the
price from falling below the parabolic, signaling an
end to the trend. Chart 2 shows the parabolic indicator
overlaid on the previous chart. Note that the parabolic
gives an exit signal (point D) the day after the ADX
experienced its first lower close.
Continued
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