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what you are looking for is so called DMI charts,
Directional Movement Indicator, or "DMI", is a popular technical
indicator used to determine whether or not a currency pair is
trending.
DMI has three significant lines.
· Average Directional Line (ADX)
· Positive Directional Index (+DI): measures an upward movement in price
· Negative Directional Index (-DI): measures a downward movement in price
Each line is plotted on top of one another, and ranges from 0 to 100.
The mathematical computations for the level of these lines are beyond
the scope of this report, but are fully explained in his book. The
default time parameter used is 14 for both the DMI and ADX period,
although highly risk-averse traders occasionally use the 30-period.
How is it used?
A high level of the ADX line indicates that the current trend is
strong. A reading under 25 indicates a non-trending market (and
therefore, range trading strategies should be looked at), while a
reading above 40 indicates a strong trending market (and therefore,
trend trading strategies should be used).
Trading signals are given when the +DI crosses the -DI line. Wilder
suggests buying when the +DI rises above the -DI and selling when the
+DI falls below the -DI. You can actually consider the DMI to be a
trading system in itself, as you buy or sell on crossovers only when
the current trend is strong.
DMI is similar to most oscillators in that traders may also look for
divergence. A divergence occurs when the price makes new highs, but
the indicator (in this case, you are looking at the ADX line) does
not. This indicates a possible reversal of the current trend. However,
many traders will still consider the trend to be strong above the
30-level, even with divergence.
When using the crossover signals a trader also looks at the extreme
point rule. The rule requires that you note the extreme points on the
day of the crossover (never enter a trade on the day of the
crossover). With a bullish signal, the extreme point is the high of
the day, whereas with a bearish signal, it is the low of the day. The
rule is to prevent you from whipsaws and "chasing the markets", as you
may receive many false signals.
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