By Mark David Johnson Mark David Johnson
Level: Basic PLUS

Mark Johnson is a full time TradeStation programmer, trader, and trading coach. He has personally developed over 60 strategies and over 200 indicators for the ...

To be a successful trader you must know when a trend is starting, the strength of the trend, and when the trend is ending. Knowing these trend events is crucial since a trend is the fundamental market mode for most profitable trading methods. Having access to this trend information when it is timely and accurate can dramatically increase your trading profits.

One of the most commonly used yet outdated tools to identify trends is the ADX indicator. The ADX line rises to show the strength of a trend. The most accurate means of using the ADX is to only pay attention to a rising ADX line, since that is when the trend strength is the strongest. Most ADX Indicators have a threshold level line somewhere around twenty or twenty-five. When the ADX is above that threshold you have a trending market and when it is below that threshold it is not trending. It's important to know these details about a trend, unfortunately, the ADX is too "hit and miss" at delivering this important trend information.

A huge problem with the ADX Indicator is the long "lag" recovery time that occurs after a strong up move. Just look at a chart with a quick strong uptrend followed by an immediate quick strong down move. You will see that the ADX Indicator completely misses the second down trend movement since the ADX line is still in a recovery phase. Another ADX deficiency is that it gives no information about the direction of the trend. I know you can use other indicators like the DMI+ and DMI- to get the direction of a trend, but I want each and every indicator on my chart to provide the most amount of accurate and timely information as possible. So why not use a trading indicator that does a lot more than the old outdated ADX Indicator can?

The Price Action Indicator is the perfect ADX Indicator replacement for the following reasons:

First, it accurately answers when a trend is starting, the strength of the trend, and when a trend is ending.Second, it gives this information without "lag". Getting these signals in a timely manner translates to more profitable trading.Third, it tells the direction of the trend without the need for other indicators like the DMI+ and DMI-.Fourth, it can be placed right on your price bars to see the inter-relationship between the price bars and the Price Action Indicator.

The Price Action Indicator simply and clearly displays all of this trend information. It shows the start of the trend by changing both the color and direction of the price action line. It displays the strength of the trend by increasing the thickness of the price action line. It does all this without the "lag" inherent in the ADX Indicator. Finally, it can be placed directly on the price bars to see the trend's relationship to the price bars, making this a vastly superior tool over the ADX. The Price Action Indicator replaces the ADX, DMI+, DMI- and most moving averages.

As fantastic as the TradeStation Price Action Indicator is, the price action line that we have covered above is just one line taken from our Multiple Time Frame Price Action Indicator which is made up of 8 different time frames price action lines. The MTF Price Action Indicator provides the greatest trading "edge".

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At one point in my trading journey I got caught up in the Indicator Frenzy. I'll bet I had a hundred. Many were indicating nothnig in particular, most were indicating the malfunction of the others! I was lost in a paradoxical insoluble, a veritable quandary!

With all these high tech, expert diagnosing, super sensitive, parameter tweaked indicators, surely I could defeat the ignorant market participants. Unfortunately, many of the other participants were way ahead of me. They had been there, done that, and were wearing nifty T-shirts featuring P.T. Barnum ("There's a sucker born every minute"). I swallowed my pride and began to regroup.As I began to develop my trading wings, I realized that my puny brain was not capable of assimilating this massive amount of information. My trader soul was screaming "KEEP IT SIMPLE, STUPID!"

Focusing on indicators will result in false signals and bad trades. Torturing your brain with massive amounts of information will also result in bad trades. The markets are polluted with TMI (too much information).

The trader must whittle it down to a manageable level to conserve your time, your sanity, and your psychological state of mind in order to perform as a rational trader. No matter how smart or how well organized you are, an overload of information will not improve your trading. A general consensus of opinion will cloud your objectiveness.

Conflicting opinions are like conflicting indicators. Useless.

The trick is not the number of indicators you use and not necessarily which indicators you use. Try to narrow it down to 2 or 3 indicators and understand what they are telling you. I don't use indicators for trading signals and I don't make trades based on indicators.

I use indicators to confirm what price action is already telling me. I also use indicators when trading divergence. My technical analysis begins with the basic skills of determining support and resistance, then moving on to Fibonacci. Indicators have their place in my trading program but not my focus.

Thanks for reading my article. To learn more please visit one of my educational websites.
http://www.lakeside21.com/
http://www.2tradesmart.com/

The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. This article has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security,currency, or asset. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable

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