Page 66 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

A longer-term trader can stay with trending positions longer by following the simple guidelines
for the ADX line. According to research by computer trading expert Bruce Babcock, a climb by the
ADX line above 40 followed by a downturn signals an imminent end to the current trend
(whether up or down). When this signal is given, traders should take profits on existing positions.
More aggressive traders can use this signal to consider taking positions for a possible move in the
opposite direction.

The charts on this page show how the ADX works. The ADX line on the feeder cattle chart gave
two signals during the year. The first downturn accurately marked the top in February, and the
second downturn above the 40 level signaled a bottom in late summer. Note that the signal in
late July was actually more than a month ahead of the actual bottom in September. The ADX
warns you of an end to the trend. In this case, it gave you more than a month's warning.

Like the feeder cattle signals, crude oil's ADX gave two signals during the year, one at the summer
low and the second at the winter high. Both signals were given by climbing above 40 and turning
down. The ADX signals by feeder cattle and crude oil signaled the end of one trend and the
beginning of a new trend. But the ADX is not designed to signal a trend reversal. It only signals
the end of the existing trend. A good example of not signaling a trend reversal is T-Bonds. The
end of the strong spring rally was accurately marked by the ADX signal in June. Then T-Bonds
consolidated in a coil until the upside breakout in the fall. An ADX climb above 40 and downturn
in November signaled another consolidation.

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