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In my self-introduction post I said I'd upload a custom indicator my two trading partners and I have found very useful and also describe a setup that uses it. We're full time traders who have a lot of programming done and I found a couple of indicators in your library that will save us some custom coding $. So, thanks.
This indicator is a multi-timeframe one that shows data about the DM indicator from a different timeframe chart. It's been very useful for us both as part of a trigger for some trades and as a filter for others.
For beginners out there, Stockcharts.com has a good detailed explanation of the DM indicator. The quick summary is that DM shows not only ADX (which measures strength but not direction of trend) but also two other lines that break up ADX into directional components (up or down). If the up line is over the down line, the trend direction is considered to be up and vice-versa.
This indicator allows you to see what's happening to DM on a higher level guide chart (or charts). We use it as a filter (to avoid bucking trends that are too strong when reversal trading -- and where it earns its keep several fold every day) and as part of the trigger in trend-following setups as in the one I'll present here.
We've found that guide chart DM info is much more useful than trigger chart DM stuff. There is a way to present guide chart DM info on a trigger chart using Ninja's native stuff, but it's incredibly clunky and ugly.
The indicator simply prints a number under each bar where the guide chart DM value changes (so not every bar has a number) that tells you a great deal about guide chart DM. Using a range of colors for the text box and the number itself, it can tell you a lot of information:
The number value of ADX (how strong is the trend?)
The slope of the ADX curve (is the trend strengthening or weakening?) -- based on text box color
The trend direction (DM up or down) -- also based on text box color
Is the trend too hot to take a reversal or too cold to take a trend trade? (based on text and box color)
The colors used to determine this and the positions of the text boxes on the chart can be changed in the parameters.
Note: you can also use it to more easily see the current chart DM/ADX data simply by changing the time setting to that of the current chart. It's much quicker than looking down at a DM indicator. However, we've found using a higher-level guide chart setting much more useful. We don't even look at current chart DM/ADX.
The above picture shows the basics of how the setup works.
The basic concept of the setup is a penetration of a significant support resistance level where the DM direction of the guide chart is with the direction of the trade and ADX is also rising (showing that strength is increasing). The other requirement is that price is not farther than 4 bars from the trigger chart 50 SMA (don't want to chase a trade). We only use range charts (the bar heights are constant) so if you use time or tick, you'll have to come up with your own "no-chase" algorithm.
I also like to see another significant S/R line (in addition to the one penetrated) supporting the trade and preferably no significant S/R lines resisting the trade that are less than the first target value away. Also, this trade works best during prime trading hours. For us, significant S/R lines are:
50 SMAs on the higher level charts (but not the trigger chart)
Session highs and lows
Prior day's high and low
More than one Strength 15 Swing HiLos in a close cluster (but not a single one)
In the example picture above, we go short when price penetrates R2 (floor trader pivot) with DM color (red box for downtrend) in the direction of the trade and ADX rising (dark red vs. pink showing strengthening trend). The entry is at the yellow arrow. We also have two significant Support Resistance lines supporting the trade (less than the stop loss away). They're the 50 SMA on the higher level guide chart and the 50 SMA on the next higher level chart. Whenever we see this particular rare variation of the setup (we call it good stacking order, i.e., all three 50 SMAs are "stacked up" in support of the trade), we shout "hallelujah" and sacrifice two goats to the trading gods. Stacking order setups tend to travel far and fast -- as did this one which moved over 30 pips in less than 10 minutes.
Note: When only one higher level 50 SMA is stacked up with the trigger chart 50 SMA, a single goat will suffice.
Note2: My broker shows pips in tenths, so the 20 range chart bars are actually 2 pips high (20 tenths).
Note also that the text boxes tell us all about DM on the guide chart. Dark red boxes tell us DM direction is down and ADX is rising (trend is strengthening). Pink boxes tell us DM direction is down and ADX is falling (trend is weakening). This chart has no green text boxes (no uptrends on the guide chart), but dark and light green boxes tell us about uptrends.
In a later post, I'll talk about how we use this indicator to filter reversal trades and how it often prevents us from looking really stupid.
Now I just have to figure out how to upload the indicator and link the indicator post to this one. It's getting pretty late, so that will likely be tomorrow.
All generalizations are false, including this one.
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
I got a private message asking for an example of how this indicator might be used. In addition to the trend setup above, I changed the picture in Downloads / Indicators to the one below which shows how it also might be used to screen potential reversals. Since a large percentage of our trades are reversals off key support / resistance levels, this is the main way we use it.
I think I've got the picture thing figured out, but let me know if the one below doesn't show.
Another way we use it is to alert us when ADX gets low indicating potential entry into a ranging market.
Again, for all of these we've found using a higher level guide chart DM more productive than using DM on the trigger chart.
All generalizations are false, including this one.
The standard, free DM indicator measures both the direction and strength of a trend (or lack thereof). In addition to showing ADX (which only measures strength) DM also shows trend directional components (up / down).
This Multi-timeframe DM Indicator …
