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Skewness, Price Extensions, and Trade Entries

A Different Perspective

I Kimball Hall

As traders, we often run into indicators that we like to use but contain too much information. We might only want a small part of that information and not need the rest. This happened to me several years ago when I was getting familiar with DMI/ADX. The current version consists of three lines, and then there are dozens of different rules traders to use to trade the indicator.

I finally reduced the indicator to one line that contained all the information I needed. I call this indicator the "DMI Volume", because it is precisely that. It is the sum of the difference as the indicator progresses in either the positive or negative direction. In other words it measures the absolute difference between the DMI+ and DMI- line, and sums that value as the indicator continues moving in one direction. Here is an example.

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In the above example, there is also a regular DMI/ADX indicator below the DMI Volume indicator for reference.

One rule commonly associated with DMI/ADX20 is the the ADX should be above 20 to trade trends. The DMI Volume also changes from red to green and the thickness of the line changes when the ADX line is greater than 20. This entire process reduces the three lines and one recognized trading rule into a single line, which can be easily read and understood.

Before we continue with a discussion about what can be taken from this different view of the DMI/ADX indicator, let's first address the Intelliscript used to create the indicator.

Link Alt file (DMI Volume.Alt)

DMI Volume        Click the file link to Download.

global volume

local one = DMI_P[0](Close, 14, 14)
local two = DMI_S[0](Close, 14, 14)
local vol = ABS(one - two)
if crossup(one,two) then
  volume = vol
if crossdown(one,two) then
  volume = vol
if barclosed() then
  volume = volume + vol
//Indicator DMIVolume
Indicator DMIVolume
if ADX[0](Close, 14, 14) > 20 then
  DMIVolume.Thickness= 2
  DMIVolume.Thickness= 1
DMIVolume.Value= volume

Please note the following

As always, this may not be the shortest, most concise code, but is created to be easily changed and modified by others. For instance, you could change the DMI tags for Close[0] and a 200 day SMA.

Link Alt File (SMA Volume)

SMA Volume        Click the file link to Download.

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So what can be easily seen by using the indicator? Here are a few of the things that really jumped out at me as I created the indicator.

  1. It is generally accepted that trends are not seen until the ADX line is above 20, seen when the line turns green. The new indicator makes it very apparent, that often, by the time the line crosses 20, 50-75% of the move is already over, so short term traders shouldn't use the ADX/DMI.

    Enlarge Chart

  2. When the indicator drops to the zero line use these points as possible support/resistance areas, and coupled with RSI or another OB/OS indicator, you may be able to find good tops and bottoms.

    Enlarge Chart

Regardless of whether or not this particular simplification of an indicator helps your trading or not, it is of benefit to look at all the indicators you use and to simplify those to just the essential information you use. Not only will you better your reaction time to trade entries, you may just see something that changes the way you use the indicator.

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