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ADX Vol Breakout

The document discusses using the ADX/DMI indicator and volume changes to identify breakout trends and trend exhaustions for trading. It explains that the strongest signal occurs when the ADX approaches and exceeds 40 alongside an increase in volume bars. It then provides guidelines for entering long or short positions when these signals are present on stocks showing breakouts from prior highs or lows.

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renger20150303
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339 views

ADX Vol Breakout

The document discusses using the ADX/DMI indicator and volume changes to identify breakout trends and trend exhaustions for trading. It explains that the strongest signal occurs when the ADX approaches and exceeds 40 alongside an increase in volume bars. It then provides guidelines for entering long or short positions when these signals are present on stocks showing breakouts from prior highs or lows.

Uploaded by

renger20150303
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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7/19/2017 ADX Vol Breakout

by Ken Calhoun (Daytrading University)

Wilder's Directional Movement (ADX/DMI) indicator provides a combined volatility and trend signal indicator that helps
identify breakout trends and trend exhaustions. An eSignal Basic Studies charting tool, it can be used in combination with
other indicators, most notably volume changes, to gauge the relative strength of breakout moves as they are occurring.

The strongest signal of the ADX/DMI indicator is found when combined with a corresponding increase in volume bars as the
ADX approaches and gets above 40.

General Overview of the Directional Movement (ADX/DMI) Tool

The ADX-DMI combines three indicators that describe the relative strength of trends, as well as provide exit signals for
exhausted patterns. Like stochastics, it is used in both entry and crossover exit trading strategies. The three components of the
ADX/DMI include:

1. The red ADX line, which indicates the trend of the market. ADX assumes trading significance once it gets over 40.
2. The +DMI measures the strength of upside pressure.
3. The -DMI measures the strength of downward pressure.

Note that the Step Parameter may also be varied; the eSignal default of 14 is preferred. You may experiment with this value for
curve-fitting purposes, much like the MA Step Parameter.

A basic +DMI/-DMI buy signal occurs when the (green) +DMI line crosses up over the (blue) -DMI line.

A basic +DMI/-DMI sell signal occurs when the (blue) -DMI line crosses down over the (green) +DMI line.

In addition, the ADX is used to measure the relative strength of the current trend, known as the directional change. When the
ADX is rising over 40, the issue is in a strong trend; when it is in the 10 - 30 range, the trend is weak.

Combining this understanding of the ADX/DMI indicators with an understanding of volume bar increases forms the basis of an
effective breakout trading strategy. Other factors that add strength to entries include monitoring the relative strength of the
sector being traded and trading only when the composite index is outside of the previous day's trading range at the time of
entry, on a new two-day high/low breakout.

Adding ADX/DMI Indicators to Your Charts

For any standard chart, go to the Analytics menu (Chart


Options/Properties/Analytics) and double click on "Directional
Movement (ADX/DMI)" from the Analytics Set-Up menu.

Click the image for a larger view.

Adjust settings as needed (line colors, step parameter). When set up


correctly, the ADX/DMI lines appear in an area underneath the
volume bars.

http://wealthv.com/TradingStrategies/ADXVolumeBreakout.htm 1/3
7/19/2017 ADX Vol Breakout

Click the image for a larger view.

A. Find a stock that has the (red) ADX line between 30 and 40
and for which the +DMI line has recently crossed to the upside
over the -DMI line.

B. Check that the average size of the most recent 5 volume bars
(e.g., 15-minute volume bars for swing trading, 1-minute
volume bars for day trades) are at least 30% greater in size than
the preceding volume bars. (Example: If volume bars 7 - 8
periods ago were 100K, it is preferred that you see 130K+ size
volume bars at time of entry.)

C. Confirm that the ADX line is making its first move over the 40
value and is not in the process of pulling back or retesting the
40 on a subsequent move after an earlier breakout.

A. Buy the first higher candle/bar that's breaking out as the


ADX gets over the 40 value on increasing volume.

B. Set an initial stop at the low end of the price that the issue
was trading at when the ADX broke over the 40.

C. As the position moves in your favor, trail a protective stop


at the low end of the prior bar/candle.

D. ADX-based stop (breakout entries): For breakout wins,


trail a stop at the point at which the ADX line loses 5
points (Example: If the position was initiated when the
ADX was at 42, and it subsequently trended in your favor
to 63 before starting to flatten out, trail a stop for the issue
Click the image for a larger view.
being trading at the point at which the ADX drops back to
58.)

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7/19/2017 ADX Vol Breakout

ADX-based stop (trending exits): If in an open position in


a slow-trending stock and the price action starts to flatten
out, exit the position immediately if the ADX starts to lose
40 because this helps confirm the loss of the trend.

E. Volume-based stop: Confirmation for all exits occurs if the


most recent volume bars start to lose 30% or more of their
value as the issue continues to trade.

A. A. Identify an issue that is taking out new multi-day low (2-day low for
day trades, 5-day low for swing trades) and for which the ADX line is
between 30 and 40.

B. Check that the (blue) -DMI line has recently crossed to the upside over
the (green) +DMI line.

C. Confirm that volume bar size is increasing to at least 30% greater than
the immediate past volume bar size.

A. Sell the position short once the ADX gets over 40, and the
stock is taking out a new low on increasing volume.

B. Trail an initial protective cover stop at the previous day's low.

C. As the position moves in your favor, trail a protective stop at


the high end of the prior bar/candle.

D. Use the same ADX and volume-based trailing stop strategies as


described in the buy strategy because the ADX/DMI and
volume indicators are identical.

Combining ADX/DMI with volume bar increases helps to identify


both the emergence of a new breakout entry and the flattening of a
trend, once the ADX drops to under 40 and volume starts to decline.
Using these technical indicators together as a system can help filter
out false breakouts and ensure that breakout entries are the strongest
at the time of entry..

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