Will ADX keep me out of sideways market? Better alternatives?
- Thread starter elit
- Start date
My own experience:
it is very lagging, especially during non-trending days when there are several mini-trends that can be exploited, but ADX won't help here, cause when it begins to show trend it is most likely already over.
So I prefer trendlines and MAs for purpose of identifying trend.
it is very lagging, especially during non-trending days when there are several mini-trends that can be exploited, but ADX won't help here, cause when it begins to show trend it is most likely already over.
So I prefer trendlines and MAs for purpose of identifying trend.
First, learn about the causes or precursors of trends.
I often discuss such here at ET.
Hint: Rising volatility and/or market seasonal price action.
Next, learn about the causes of trendless or sideways markets.
I and others often discuss such here at ET.
Hint: Declining volatility and/or market seasonal price action.
Next, examine all your past charts (go back a few years) and annotate all the sideways markets and annotate when the market moved into a trend market from those sideways markets.
Annotations should concern any key economic report times, key schedule market events, major world political events et cetera.
Learning all the above not only allows you to understand what's really moving the markets...
You'll be able to better understand the strengths and weakness of your indicators or non-indicator method.
Just as important, you can avoid drawdown periods because you'll know when to adapt/change your trading plan from one month to the next month.
Mark
As an addendum to Mark's (as usual) excellent comments, you may want to consider simple Wyckoff Price/Volume analysis. Trading-ranges are usually preceded by climatic action - High volume, wide price spreads closing near/at the highs, parabolic price action. This is usually accompanied by good mkt news (in a buying climax), that and the strong price action brings in the public. Mkts cycle between high-volatility (trend) and low-volatility (range/consolidation). When the trend has exhausted itself, it has to rest and absorb the previous price action and prepare itself for the next move, either up or down, which will be determined by whether there is accumulation/distribution or re-accumulation/re-distribution occurring w/in the trading-range.
For instance look at the present situation in the currency GBP futures. (You may have to click on the chart to get the full view.)
http://tinyurl.com/ycyr69
There is a very long trading-range going back to May, then from A to B a parabolic rally that breaks out of the range on expanding volume and wide spreads, most closing on the highs, w/little retracement along the way. Then on 11/30 and 12/01, the last 2 days of the rally, we see the highest vol in months, including the entire range. All taken together - a parabolic rally (which can only be sustained for so long), wide spreads, massive vol, plus the fact that we're near the extremely important psychological and technical resistance at the 2.00 mark, suggests climatic behavior. And just to show that I'm not completely full of shite, I mentioned this very pv behavior in this thread on 12/04, the day the retracement of this rally began:
http://elitetrader.com/vb/showthread.php?s=&threadid=79308&perpage=20&pagenumber=2
So now one looks at the nature of the retracement following the climax. What do we see here? Well, vol has remained strong on the reaction, which suggests at the very least that there is further downside to go. However on Fri we see massive vol on a very wide spread closing on the low, this suggests temporary climatic behavior on that reaction. Here one is trying to determine if this latest rally was what Wyckoff referred to as an Upthrust, which will result in a drop back down into the range and a continuation of the range, or a downtrend that breaks down thru it, or a Sign of Strength, which is a true breakout and the start of a new uptrend. I suspect this is not an upthrust, for one because of the time factor (it has held well) and also because of what Wyckoff referred to as Effort vs Result. Despite the strong vol on the reaction, the retracement (of A to B) thus far is quite shallow.
At this point, intraday, as of this writing, the mkt is continuing lower, and I suspect, even if we drop lower, there will be a consolidation period above that previous long trading-range where more accumulation will take place, before the mkt can significantly rally again.
Wyckoff has very specific criteria to attempt to determine what the mkt is doing, trending or consolidating, and where it is w/in that particular phase. I won't go into it too deeply here, there's just too much, but most simply, for a trading-range: There is a trend that ends w/a Buying Climax, then an Automatic Reaction (as the buyers are exhausted) - these two high/low points establish the boundaries of the ensuing range - this followed by a secondary test of the BC, followed by a series of tests of the range boundaries, these are either shallow or deep, upthrusts or shakeouts, and finally there is a positive test of the range followed by a Sign-of-Strength, a strong breakout of the range on just the kind of pv behavior we see on the GBP chart from A to B. The point at A is the shallow, positive test of the previous low at X. Note also the contracting volatility of the whole range here, as it starts off w/wide swings from May thru the beginning of Aug, then narrows from Aug to Nov. This is classic Wyckoff pv behavior of high-volatility in the beginning of the range as it first comes off the trend, then cycling to lower volatility near the end of the range as the mkt "winds itself up" in preparation for the next move.
Harold
For instance look at the present situation in the currency GBP futures. (You may have to click on the chart to get the full view.)
http://tinyurl.com/ycyr69
There is a very long trading-range going back to May, then from A to B a parabolic rally that breaks out of the range on expanding volume and wide spreads, most closing on the highs, w/little retracement along the way. Then on 11/30 and 12/01, the last 2 days of the rally, we see the highest vol in months, including the entire range. All taken together - a parabolic rally (which can only be sustained for so long), wide spreads, massive vol, plus the fact that we're near the extremely important psychological and technical resistance at the 2.00 mark, suggests climatic behavior. And just to show that I'm not completely full of shite, I mentioned this very pv behavior in this thread on 12/04, the day the retracement of this rally began:
http://elitetrader.com/vb/showthread.php?s=&threadid=79308&perpage=20&pagenumber=2
So now one looks at the nature of the retracement following the climax. What do we see here? Well, vol has remained strong on the reaction, which suggests at the very least that there is further downside to go. However on Fri we see massive vol on a very wide spread closing on the low, this suggests temporary climatic behavior on that reaction. Here one is trying to determine if this latest rally was what Wyckoff referred to as an Upthrust, which will result in a drop back down into the range and a continuation of the range, or a downtrend that breaks down thru it, or a Sign of Strength, which is a true breakout and the start of a new uptrend. I suspect this is not an upthrust, for one because of the time factor (it has held well) and also because of what Wyckoff referred to as Effort vs Result. Despite the strong vol on the reaction, the retracement (of A to B) thus far is quite shallow.
At this point, intraday, as of this writing, the mkt is continuing lower, and I suspect, even if we drop lower, there will be a consolidation period above that previous long trading-range where more accumulation will take place, before the mkt can significantly rally again.
Wyckoff has very specific criteria to attempt to determine what the mkt is doing, trending or consolidating, and where it is w/in that particular phase. I won't go into it too deeply here, there's just too much, but most simply, for a trading-range: There is a trend that ends w/a Buying Climax, then an Automatic Reaction (as the buyers are exhausted) - these two high/low points establish the boundaries of the ensuing range - this followed by a secondary test of the BC, followed by a series of tests of the range boundaries, these are either shallow or deep, upthrusts or shakeouts, and finally there is a positive test of the range followed by a Sign-of-Strength, a strong breakout of the range on just the kind of pv behavior we see on the GBP chart from A to B. The point at A is the shallow, positive test of the previous low at X. Note also the contracting volatility of the whole range here, as it starts off w/wide swings from May thru the beginning of Aug, then narrows from Aug to Nov. This is classic Wyckoff pv behavior of high-volatility in the beginning of the range as it first comes off the trend, then cycling to lower volatility near the end of the range as the mkt "winds itself up" in preparation for the next move.
Harold
just for the record, i don't think declining volatility is a CAUSE of "trendless" markets, it is a RESULT of trendless markets
saying declining volatility is a cause of trendless markets is like saying reduced vehicle speed is a cause of me pressing my brakes. no. me pressing my brakes results (hopefully) in reduced speed.
market profile theory, imo, offers an excellent way to view market development and determine when market is rotating around value (a term i prefer to "trendless" which i find has less utility and is less precise as a model) or is seeing a shift in value and developing vertically to seek new value.
personally, i PREFER (so called) trendless markets when scalping the dow minis, because i find it matches my trading style when it comes to intraday scalps.
but i agree that ADX is pretty laggy.
what i also look for is market INTERNALS. i want to see if there is institutional capping, buy programs, sector strength, etc. these are preferable imo, to lagging indicators like MA's, EMA's, etc.
saying declining volatility is a cause of trendless markets is like saying reduced vehicle speed is a cause of me pressing my brakes. no. me pressing my brakes results (hopefully) in reduced speed.
market profile theory, imo, offers an excellent way to view market development and determine when market is rotating around value (a term i prefer to "trendless" which i find has less utility and is less precise as a model) or is seeing a shift in value and developing vertically to seek new value.
personally, i PREFER (so called) trendless markets when scalping the dow minis, because i find it matches my trading style when it comes to intraday scalps.
but i agree that ADX is pretty laggy.
what i also look for is market INTERNALS. i want to see if there is institutional capping, buy programs, sector strength, etc. these are preferable imo, to lagging indicators like MA's, EMA's, etc.
Volatility is more predictable than direction. Quiet leads to range expansion. Expansion leads natutrally to consoldiation.
If you book at least half of your profit once ADX peaks, you'll sidestep most chop. IF you don't have a position, it doesn't matter then, does it?
ADX is of value < 20 (trendless) and > 40 (approaching unsustainability). Works very well in conjunction with narrow Bollinger WIDTH
Neither......eh...... work as well when they're divergent. Once price has hugged either band for a move, it's due for what you want to avoid......sideways.
As for the "lagging" aspect of ADX, it indicates the strength of a trend. That's all it does., That's all it's supposed to do.
If you book at least half of your profit once ADX peaks, you'll sidestep most chop. IF you don't have a position, it doesn't matter then, does it?
ADX is of value < 20 (trendless) and > 40 (approaching unsustainability). Works very well in conjunction with narrow Bollinger WIDTH
Neither......eh...... work as well when they're divergent. Once price has hugged either band for a move, it's due for what you want to avoid......sideways.
As for the "lagging" aspect of ADX, it indicates the strength of a trend. That's all it does., That's all it's supposed to do.
I've looked at just about every indicator known to the free world (ie, I haven't bought any of Jurik's stuff 
) <a href="http://versaluna.com/ensign/adx.htm">including ADX</a>, and, aside from simple Supt/Resist and price action, I still like RSI for chop/trend indication as it is just so simple. This example is with RSI, but you could do a similar thing with a stochastic, using pretty much the same settings.
When price chops, indicators will "center". RSI will mash around 50. A typical mash range is 45 to 55. Once RSI pushes through the upper or lower range, you can use an MA to confirm the break and place your trade in the direction of the break.
I use a Fisher RSI, which in effect exaggerates RSI and makes it more Stochastic like. Through experimentation, I typically Fisherize with a .1 factor on the standard RSI-14.
OK, that's the indicator. Now for how I use it.
For day trading, I have concluded that I ignore indicator panes. That's me, that's my quirk. However, I do find that what indicators can do to be useful, so I put the most relevant information on the chart itself.
RSI is, of course, useful for divergence, but as I mentioned, my daytrading quirk means I probably won't see or use it. So, when day trading with RSI I am interested only in two things: chop and extremes.
When the Fisherized RSI is between 45 and 55, I put orange highlights (or orange bars) on the chart. When RSI is at extremes, I put a Yellow ribbon on the chart and/or I'll color the bars purple for over-bought and green for over sold.
Here are two examples. You can see chop areas are highlighted and that breaks of the chop in the direction of "the trend" can be well set-up.
By the way, yes, of course "indicators lag". Duh. However, if one is at the point in their trading where identifying chop areas is necessary, lag is not the most important criteria. To "speed" things up, you could use a stoRSI if you want "faster" indications. The core idea is to use the centering quality of the indicators to your advantage.
best, amg
<a href="http://versaluna.com/2006/061211_amg23_rsiV450.png"><img src="http://versaluna.com/2006/061211_amg23_rsiV450.png" width="100">Vol Chart example</a>
<a href="http://versaluna.com/2006/061211_amg24_rsi15m.png"><img src="http://versaluna.com/2006/061211_amg24_rsi15m.png" width="100">15m Chart example</a>
) <a href="http://versaluna.com/ensign/adx.htm">including ADX</a>, and, aside from simple Supt/Resist and price action, I still like RSI for chop/trend indication as it is just so simple. This example is with RSI, but you could do a similar thing with a stochastic, using pretty much the same settings. When price chops, indicators will "center". RSI will mash around 50. A typical mash range is 45 to 55. Once RSI pushes through the upper or lower range, you can use an MA to confirm the break and place your trade in the direction of the break.
I use a Fisher RSI, which in effect exaggerates RSI and makes it more Stochastic like. Through experimentation, I typically Fisherize with a .1 factor on the standard RSI-14.
OK, that's the indicator. Now for how I use it.
For day trading, I have concluded that I ignore indicator panes. That's me, that's my quirk. However, I do find that what indicators can do to be useful, so I put the most relevant information on the chart itself.
RSI is, of course, useful for divergence, but as I mentioned, my daytrading quirk means I probably won't see or use it. So, when day trading with RSI I am interested only in two things: chop and extremes.
When the Fisherized RSI is between 45 and 55, I put orange highlights (or orange bars) on the chart. When RSI is at extremes, I put a Yellow ribbon on the chart and/or I'll color the bars purple for over-bought and green for over sold.
Here are two examples. You can see chop areas are highlighted and that breaks of the chop in the direction of "the trend" can be well set-up.
By the way, yes, of course "indicators lag". Duh. However, if one is at the point in their trading where identifying chop areas is necessary, lag is not the most important criteria. To "speed" things up, you could use a stoRSI if you want "faster" indications. The core idea is to use the centering quality of the indicators to your advantage.
best, amg
<a href="http://versaluna.com/2006/061211_amg23_rsiV450.png"><img src="http://versaluna.com/2006/061211_amg23_rsiV450.png" width="100">Vol Chart example</a>
<a href="http://versaluna.com/2006/061211_amg24_rsi15m.png"><img src="http://versaluna.com/2006/061211_amg24_rsi15m.png" width="100">15m Chart example</a>
whitster, how do you determine if there is institutional capping from market internals? Thanks.