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12 February 2011ICHIMOKU TREND TRADING - CONFIRMATION WITH
ADX
Ichimoku Trend Trading- Confirmation with ADX Indicator
This article assumes the reader has basic knowledge of the
Ichimoku Kinko Hyo trading system.
As you know, Ichimoku Kinko Hyo is predominantly a
trend-following indicator, with multiple
confirmations in built within the system. We will share with you
here how you can further enhance
the system by utilising other (Western) indicators to confirm or
better time your trades, for trend
following in particular. The indicator we are discussing is the
Average Directional Index (ADX)
Indicator.
The ADX was developed by J. Welles Wilder to determine the
strength of a trend, and whether the
market is trending or not, regardless of direction. This is
useful because markets tend to range
about 80% of the time and if you are a trend trader, you will
not want to miss the trends or enter
trades prematurely. The ADX is an oscillator which fluctuates
between 0 and 100, with a reading
above 20 signalling a trend, and a reading above 40 signalling a
strongtrend.
In most charting packages, the ADX line is accompanied by 2
other lines called the Positive
Directional Indicator (+DI) and the Negative Directional
Indicator (-DI). Generally, a buy signal
occurs when +DI moves above -DI and a sell signal when +DI moves
below the +DI. In a ranging
market, this happens frequently and produces trade-unfriendly
whipsaws so it is not advisable to
trade solely on +DI/-DI crossovers.
Using ADX with Ichimoku Kinko Hyo
Figure 1: Ichimoku Chart with ADX Indicator Below
APF Trading Pte. Ltd.9 Battery Road12F Straits Trading
BuildingSingapore 049910
Glenn [email protected]
Jay [email protected]
Website:www.apftrading.comwww.asiapacfinance.com
APF Trading Pte. Ltd.9 Battery Road12F Straits Trading
BuildingSingapore 049910
Glenn [email protected]
Jay [email protected]
Website:www.apftrading.comwww.asiapacfinance.com
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12 February 2011ICHIMOKU TREND TRADING - CONFIRMATION WITH
ADX
Ichimoku traders commonly use the Tenkan Sen/ Kijun Sen cross
for trend following entry/exit
triggers, with confirmations from the other elements such as the
kumo break and direction of
future kumo, as well as the Chikou Span.
Entry Confirmation
However, from the chart above, it is evident that the ADX is
also a powerful way to confirm a trend.
Starting from the left (black) vertical line of the green shaded
portion, you will see that Tenkan Sen
has not yetcrossed Kijun Sen. During this time, the Ichimoku
Kinko Hyo system alone will paint a
bearish price action picture. But observe that +DI is above DI,
giving an early signal of a bullish
movement. The ADX is also above 20, signalling a strengthening
trend. A confirmation from both
the indicators gives a trader more conviction in a bullish
sentiment.
Exit Confirmation
Likewise, observe the right (black) vertical line of the green
shaded portion. With Tenkan Sen
above Kijun Sen and a thick bullish Kumo ahead, price is
strongly trending upwards. However, we
see the +DI crossing below the DI, signalling a bearish
sentiment and a potential exit on long
positions. It works out very well in this scenario to exit the
long position as we see shortly after
price starts to head south. This showcases how the ADX can be
timelier in trade exits, as opposed
to waiting for the Tenkan Sen to cross below Kijun Sen (9
periods later). Another way traders
observe the ending bullish trend is through the divergence
observed, when price is making higher
highs while the ADX reading is making lower highs.
Not every trade will paint such a perfect picture but ADX can be
an extremely useful buddy to
pair with the Ichimoku Kinko Hyo, as you have seen. And this
works across multi assets classes.
APF Trading is a trading advisory firm offering clients advice
on multi-asset trading strategies,
signals, trading systems, execution services and trading
platforms. The firm also conducts research
and technical analysis with a focus on Ichimoku Kinko Hyo and
DeMark Indicators.
