My two favorite indicators are RSI and ADX and there are a variety of ways to use just these 2 indicators for momentum trading.  It takes awhile to really discover which way is best for you but I’m going to describe one way I use the ADX to eliminate stocks from my watchlist that have potentially peaked for the short term.

Below I drew a box around the area where the ADX and +DI line were moving higher in tandem, as MIPS continue to hit new highs. This is what you want to see as confirmation that the trend is behaving correctly. When the +DI line crosses down through the actual ADX line you really have to pay attention to the price/volume action. as it could be a sign the trend is going to reverse or move sideways for awhile.

This is the time I like to exit because there really is no way to tell which of the above scenarios will play out, and you are either going to tie your money up for awhile or lose it. I don’t like either of those outcomes.

Yes MIPS went on for another 40% gain, but I could show you dozens of charts that just the opposite happened. One way to try and play this is if you had traded this on the way up, scale out of your position and hold 25% of it through the correction if you want. It’s still risky but you could score big as was the case with MIPS.

Finally, the negative divergence is a clear sell signal if you would have held until now indicating a blow off type move. This really needs about 6-8 weeks on consolidation before it sets up for another big move higher as it digests it’s 200% move from August.

Completely off topic, I found this video on the mimic octopus yesterday and couldn’t believe I hadn’t heard of it before. Check it out here. This creature would be a great trader as it knows how to adapt to it’s environment!

4 Responses to “One Way to Use ADX in Momentum Trading”

  1. Georgeinbrton Says:

    Hi Jeff.

    Thanks a lot for this. I’ve taken a bit of time to check out the ADX with some of my positions and it’s definitely another indicator worth looking at.

    You never mention ETF’s on your site. I’ve had some good winners with these, particularly with some of the emerging market ones particularly ECH, EPU, THD, IDX, TUR. The technical indicators aren’t positive at the mo, except ECH which is just kicking off, but when they go, they’ve need minimal trading in the past.., SLV is looking good again too.

    Keep up the good work Jeff and many thanks. Still checking out your site each day.

    Kind regards

    George (in theUK).

  2. zentrader Says:

    Using the ADX isn’t a perfect science but if you really use it all the time you start to notice little clues that can predict when stocks could be potentially topping. I’m glad you found the article useful and if you find something that’s working as well be sure to let me know!

    There are so many way to use these indicators. We’re only limited by out imagination.

    Have a great weekend George!

  3. zentrader Says:

    Oh. as far as ETF’s. I find they’re more for traders who can’t be in front of their computers all day. Be careful with them, I just watched this show last night where Paul Kedrovski bashes the entire EFT industry with good reasons.

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