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A Pro’s Favorite Safety-First Indicator
02/23/2012 10:39 am EST
Professional trader Hubert Senters explains how to use the Directional Movement Index (DMI) indicator to identify dangerous conditions when the best trade is no trade at all.
As a trader, you have thousands of indicators that you can choose from to make trading decisions every day. Our guest today is Hubert Senters to talk about one of the ones he looks at. So Hubert, you have an indicator that you look at each day; what is it?
I have an indicator that will keep me out of trouble a lot of times; it is called the DMI, or Directional Movement Index. It is coupled up with two indicators, one of them being the ADX (Average Directional Indicator).
Usually, when you are getting ready to place a trade or are thinking about placing a trade, you want to know to know two things: 1) Is the market trending, and 2) In what direction is it going, which is pretty important.
So the first part of the indicator of the DMI is an ADX. If the ADX is above 20, it means the market is probably trending and you are safe to go in to the market. If the ADX is below 20, it means that the market is sloppy and choppy, and you need to sit on your hands.
Now, there will be two different colors on the rest of the indicator, green for bullish price action and red for bearish price action. If the green is on top of the red, that is bullish; if the red is on top of the green, that's bearish.
So now you know the direction and you know if it is trending or not, so you can either place the trade or walk away.
Is this something that is used best on an index of the overall market, because that is what DMI is looking at?
I have been using it on just about everything. I will use it to figure out if I am going to go long or short the gap on the index futures, I have been using it on a daily time frame; it is really useful on a lot of stuff.
It is just a good filter to put stuff through to go "Alright, is it trending, yes or no? Is the direction higher or lower?"
Is DMI available on pretty much any trading platform?
It should be on every platform, DMI. If it is not, you should be able to Google it and find out some source code and just have it programmed up. It is a very simple indicator that is on most charting platforms.
Then is this something I would use at the very open or before the open? When do you like to look at it?
I like to give it at least five minutes-two to five minutes-and then starting looking at. Usually, right at the open, two to five minutes from then, and you are good to go.
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