Directional Movement at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Directional Movement

Directional movement is a system for providing trading signals to be used for price breaks from a trading range. The system involves 5 indicators which are the Directional Movement Index (DX), the plus Directional Indicator (+DI), the minus Directional Indicator (-DI), the average Directional Movement (ADX) and the Directional movement rating (ADXR). The system was developed J. Welles Wilder and is explained thoroughly in his book, New Concepts in Technical Trading Systems .

The basic Directional Movement Trading system involves plotting the 14day +DI and the 14 day -DI on top of each other. When the +DI rises above the -DI, it is a bullish signal. A bearish signal occurs when the +DI falls below the -DI. To avoid whipsaws, Wilder identifies a trigger point to be the extreme price on the day the lines cross. If you have received a buy signal, you would wait for the security to rise above the extreme price (the high price on the day the lines crossed). If you are waiting for a sell signal the extreme point is then defined as the low price on the day's the line cross.

The system works best according to Wilder on securities that have an ADXR value above 25.

A good variation of the Directional Movement system is to plot the difference between the positive Directional Indicator and the negative Directional Indicator. The result is plotted on the chart below and can be used to look for divergences between price and the indicator.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.