Archive for March, 2010

Technical Indicators: Using ADX To Determine The Strength Of The Trend

Explanation of ADX (Average Directional Index)

* +DI line indicative of how strong the buyers are and the -DI line indicative of how strong sellers are.

* ADX above 40 (some use other lower numbers) and raising ==> Strong Upward Trend.

* ADX below 20 ==> Ranging Market.

* +DI line above -DI line, buyer is in control.

* -DI line above +DI line, seller is in control.

* Do not use trend trading strategy when the ADX is below both the +DI and -DI lines.

Trading Psychology, Trading System And Money Management

"Every winner needs to master three essential components of trading; a sound individual psychology, a logical trading system and good money management.

These essentials are like three legs of a stool – remove one and the stool will fall, together with the person who sits on it. Losers try to build a stool with only one leg, or two at the most.

They usually focus exclusively on trading systems. Your trades must be based on clearly defined rules. You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game."

~Dr. Alexander Elder

On-Balance Volume And The Bollinger Band

On-Balance Volume

* The on-balance volume (OBV) indicator is a cumulative total of volume, calculated by adding the volume on days the price is higher than the previous day and substrating the volume on days the price is lower than the previous day.

* The OBV indicator tells you how much money is flowing into or out of an instrument.

* If OBV is falling, it indicate that people are selling the stock, conversely, if OBV is rising, it means that people are buying into the stock.

* Premise – if a stock is going up, meaningfully, good volume is needed (vice versa, same holds true, if a stock is decreasing).

* If the stock price is going up and the OBV is coming down, an indication that the stock is being distributed (i.e. sold) be the smart money.

Bollinger Band

More on Bollinger Band (both video and written explanation) can be found at bollinger band.

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