November 27, 2008
Forex Day Trading - When To Stay Out Of The Markets
A lot of forex traders like to trade the shorter time frames such as the 1 and 5 minute charts, but it is very difficult to make consistent profits this way. This is because you have to contend with all the noise on these charts where the price just seems to drift aimlessly in a seemingly random fashion. Therefore there is one golden rule which you should stick to when trading these short time frames.
Basically you should always stay out of the markets when the ADX technical indicator is below 20. This indicator tells you whether or not a clear trend is in place and the general rule is that if it's below 20 then there is no trend.
So therefore you can instantly tell whether you should be trading the markets or not. Of course when the ADX is below 20 it's still worth keeping an eye on this particular currency pair because a rise above 20 could signal the start of a new trend, particularly if the directional movement indicators cross at the same time.
The ADX indicator is a very useful indicator because not only does it keep you out of flat trendless markets, but it can also help you exit your positions at the optimum point. The key here is to exit your position as soon as the ADX starts to turn down, particularly if it is above 40 or 50 for example, because this indicates that a trend is running out of momentum.