If you have downloaded a free copy of The Money Flow Cycles you know I use the ADX/DMI indicator as part of 1 of the 4 check list for a good trade. The ADX/DMI indicator will not only alert you to trend change but also a trend less market. The indicator is two indicators in one. The ADX line tracks trend strength, raises on strong trend regardless of direction and drops on weak trend. It also will warn you when a move is over extended by breaking outside the DMI bands. If the ADX raises above the bands tells you the current trend is over extended you should to lock in profits. It tends to signal early so also check TSI and RSI. If ADX drops below the bands this is a signal that there is no trend at all and your locked in a trading range.
This is your warning that the moving averages can’t be trusted. If ADX is below 15 I don’t get too excited about a 5/20 crossover (1 of 4 on the trade check list). Notice the Natural Gas Chart below.
Spend time with the indicators you use. Learn to hear the message they are telling you. There is a lot to many indicators then just buy and sell signals. I use 4 indicators. Each tells a part of the story and pick up where the other leaves off. We can never be certain but we can weigh the evidence and take the trades that put the odds in our favor.
In the Nat Gas chart above ADX and support resistance levels tells me we are in trading range. But moving averages and TSI i use have signaled BUY. So I BUY then realize there could be some whip saws action so to try to avoid this I place the stop loss order BELOW support. This stop is little further out then I would otherwise be happy with. But I must let price, market structure, and indicators tell me what is the right move not some hard fast %.