A Reliabe Change of Trend (Sell Indicator) – The Wilder DMI

On September 16, 2008, In Technical Analysis, by Steve Warshaw

Overview:

The question I recieve more often than just about any other is:

How do I know when to sell?

Naturally, a detailed answer to this question depends on your trade management strategy, risk tolerance, and market conditions just to name a few. However, as technical analysts, we always use indicators to help us time and verify our buy and sell decisions.

Let me start by reiterating that there is not one perfect indicator for ANY market , let alone all markets. You should develop your basket of technical tools to include trend, velocity, quality, accumulation / distribution, and other oscillators which are suiteable for the current market.

That said, I wanted to show you a very reliable change of trend indicator, the Wilder DMI.

Rules

The security must be in a clear up or down trend
The longer the DI matching the current trend (DI+ for uptrend, DI- for downtrend) stays above the ADX, the more accurate the signal
The ADX must clearly breakout above the DI for the trend
The ADX must roll over outside the DI for the trend
When the ADX rises from below 20 to above 20, it is said that a new trend has started
ADX readings above 25 are considered strong trends, and anything bove 30 is considered a very strong trend.

You should also look for signals from momentum and accumulation / distribution indicators to confirm the timing of the reversal.

Analyzing a Real Chart

Take alook at the S&P 500 for the past 3 years. The +DI crosses above the ADX and DI- in early Augst, 2006. The chart continues in a clear uptrend through late February 07, before correcting. A reversal of trend indication is given by the WMI as it rises above the DI+ and rolls over between december 06 and february 07. The ADX drops below 20 in August of 07, clearly showing the current trend has run out of steam.

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