Options Trading Blogspot - System to Find Stock Trends

Jan. 17, 2011 - PRLog -- Options Trading Blogspot

This system primarily uses Directional Movement Index (DMI) and Average Directional Movement Index (ADX). In addition moving averages and Bollinger bands are looked at for guidance and volume to show conviction of the emerging trend. There are plenty of articles that go into the technical side of these indicators and how they work but they are fairly complex and not easily understood (by me)! This article focuses on one way to use these indicators and does not worry about the formula behind them. It is a very simple strategy and the rules simple to apply. It is also very effective.

There are several charting software packages available on the web, some charge and some free. I like to use the free ones and the one I use is noted in my blog. Once you have the software that has DMI / ADX indicators, set them as follows: ADX set at 5 smooth. DMI+ and DMI- to be set at 5 periods. I also add onto the chart Bollinger bands set at 20 periods simple and also add a 20 and 50 day moving average. The software should allow you to adjust these settings.

The DMI+, also shown as +DI on some charts shows upward trend movement. That is, the stock has an upward trend. DMI- or -DI shows a negative trend. One way to think of this is, if the DMI+ is on top of the DMI- on the chart then the bulls are in charge. If DMI- is on top then the bears are in charge. The DMI+ is often shown in green and DMI- in red. The ADX shows the strength of the movement. If DMI+ is on top and the ADX is low and going down then the bulls are running out of puff, or never had much puff in them in the first place. What we are looking for is a cross over where one side is gaining ground and that there is strength building behind it, shown by an upward moving ADX. I use this system for finding new directional trades, but it can be used for sideways movements as well. But to keep things simple here are the rules for directional trading. Get Internet #1 - Options Trading Blogspot @ http://tradingcure01.webs.com and be Successful forever!

When DMI+ crosses above DMI- and the ADX moves up through the space between the DMI lines, then this is a bullish indicator. It may be that the ADX is already above both DMI lines and moves up, showing strength, but I tend to wait for a movement up through into the gap (also referred to as the zone) and going in an upward direction. Conversely, if the DMI- crosses above DMI+ and the ADX moves up into the gap in an upward motion then it is a bearish indicator and I would place a bear trade. The ADX moving up from a low and crossing into the gap in an upward movement shows growing strength and I have found this to be a reliable indicator for the trend to develop.

I also look at the Bollinger bands and if the stock is up against one of the bands, there is a likely hood that the trend may be coming to an end. I would not let this prevent me entering a trade, but I would keep a close look on it. Likewise, if the stock is moving up or down and about to hit the 20 or 50 day moving average then this may also stop that directional move. What I look for are trades where the DMI's have crossed over, the ADX is moving up through the gap/zone in an upward movement and that the stock has some distance to move before hitting the moving average lines. I have found that this system gives a 70%-75% success rate. It's also a very conservative approach to use the DMI/ADX indicators. Get Internet #1 - Options Trading Blogspot @ http://tradingcure01.webs.com and be Successful forever!

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