September 25, 2014

2 Technical Indicators That Can Keep You Out Of Trouble

If you want to make consistent profits from forex trading, you need to wait for the very best set-ups to occur. However even if you find the perfect set-up, you can still end up losing money if you enter at the wrong time, like just before a major economic data release, for example.

So in this article I want to discuss two technical indicators that can keep you out of trouble so that you don't end up entering a trade when you should be sitting on the sidelines.

1. ADX Indicator

The ADX indicator is a very powerful indicator that I have been using for several years now because it basically tells you how strong the current trend is.

A trending market occurs when the ADX is above the 20 level (although you can also use the 17 or 23 level if you prefer), so this is a good time to enter a position, whilst you should be out of the markets when it is below 20 because this indicates a trendless market.

A rising ADX indicates that the trend is strong, whilst a falling ADX indicates that the trend is weakening all the time, so this is another factor to consider when entering a trade.

It's generally a good idea to look at the ADX indicator for both the current time frame as well as two higher time frames to get a bigger picture of the overall trend. So for example, if you trade positions off the 1 hour chart, you might want to look at the ADX indicator on the 4 hour and daily chart as well.

One final point is that you can find great breakout trades by waiting until the ADX falls below 20 (and stays there for quite some time) and then jumping in when you get a price breakout that is accompanied by a rising ADX. (If the ADX continues falling even after a breakout, it may indicate that this is a false breakout).

You can also wait for the ADX to cross the ADXR indicator if you have this on your chart because this will often mark the beginning or the end of a trend.

2. ROC n Roll Indicator

Most people won't have heard of this particular indicator because it is not commonly found on many charting platforms, but this is another of my favourite indicators that I like to use because it has often kept me out of trouble.

Found on the IG and Prorealtime charting package, this ROC n Roll indicator, which is derived from the ROC (rate of change) and the EMAs of different periods, is very easy to use because at any given time it will either show a red, green or blue bar.

As you might have guessed, a red bar indicates a bearish trend and a green bar indicates a bullish trend, whilst a blue bar indicates that there is no clear trend at all at the current time.

Again this is useful to look at on both the current time frame and on two of the higher time frames, such as the 5, 15 and 1 hour time frame, for instance, if you were trading the 5 minute chart.

If the higher time frames are showing a blue bar, it's generally a good idea to sit on the sidelines, regardless of what it indicates on your current time frame, whilst it's always a sign of a strong trend when you see a green or a red bar on all of these time frames.

Here's what both of these indicators look like on the daily chart of the GBP/USD pair to demonstrate how effective they are:

gbpusd25sept.png




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3 Comments on 2 Technical Indicators That Can Keep You Out Of Trouble »

September 29, 2014

Jack Maverick @ 11:25 am:

Good article. I can't stand RSI or Stochs, but LOVE the ADX - I use the "Hull Style" on my 4-hour and 1-hour charts and it often alerts me to changes in direction SEVERAL candles before moving averages cross over.

October 8, 2014

Bob @ 3:31 pm:

Hi James,
Thank you for the article above. I've been using the RSI and Stoch since I started trading five years ago and have been messing around with their configuration in order to get a setting that might give me a better entry and exit but without much success. I also use the MACD. I've never really looked at the ADX because I don't really understand how to use it until your article here. Where can I get the ADXR and the Roc n Roll indis and are they free? Thanks.

October 9, 2014

James Woolley @ 8:46 am:

Hi Bob, the ADXR line should be alongside your ADX indicator, and the Roc n Roll indicator is found on the Prorealtime charting platform, which is available for free from certain brokers such as IG.

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