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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. (Article continues below this video)
Watch the video titled "Price Action Indicator - Move Over Outdated ADX Indicator".
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One of the most commonly used yet outdated tools to identify a trend is the ADX indicator. The ADX line rises to show the strength of a trend. The most accurate method of using the ADX Indicator is to only pay attention to a rising ADX line, since that is when the trend strength is getting stronger. Most ADX Indicators have a threshold level line somewhere around 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 downtrend followed by an immediate upward movement. You will see that the ADX Indicator completely misses the second movement since the ADX line is still in a recovery phase. Here is chart example in this ADX indicator article http://www.investopedia.com/articles/technical/02/041002.asp.
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 So why not use a trading indicator that does a lot more than the old outdated ADX Indicator can?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 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 price action lines each showing a different time frame. This is why the MTF Price Action Indicator provides the greatest trading "edge".
Next is Part 3 - MTF Price Action Indicator - The Greatest Trading "Edge".
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