Parts 3 and 4 of the “on chart” lessons for reading the ADX. They go pretty quick and there’s some icky clicking, but I made them before I figured out how to really reduce the clicking. Anyway, it’s the PRINCIPLES of the ADX that matter here, and how to combine various patterns of strength and weakness. The ADX is one indicator that is great at showing strength and weakness.

This first video for today also has a little bit on the DMI/DI lines, in addition to showing the ADX principles on real charts. I don’t pay the directional movement indicator/index lines much attention because they really don’t deserve it, but there is a little bit. You could spend years studying those two lines and trying to figure out one significance after another. I don’t, however recommend that course of study.

This second video on the ADX is more of the same, but goes into some other aspects of ADX reading that aren’t covered in other videos. Again, these are from real time charts…

That’s about the extent of the information on the ADX that I’ll be giving out here on the blog. There will be more on the inside, coming in August.

The principles of the ADX and the conditions are given in previous posts.

So if you have any comments or questions, please leave them below. And while you’re at it, sign up for the email stuff above (and to the right). You give me your name and email address, and I’ll give you free silver membership into the “Inner Sanctum” when it opens up in August.

And let me know what kind of stuff you want to see in the Inner Sactum. I’ll do what I can to make it happen. Have a truly phenomenal trading day!

Below is a video that shows a couple more ADX principles and shows how to look at them on a chart, including the theory behind the ADX. I’ll review a bit after the video…

So you see the difference between the strength and the weakness in trends? While the market moves farther in a direction, the ADX either moves higher than it was, or it doesn’t.

When the ADX moves higher as the market moves farther up or down, (after strength shown in that direction) then that’s strength.

When the ADX does not move higher as the market moves farther (after the ADX has already show strength in that direction), then that’s a weak move at the time.

XOW - ADX Outta Whack

Also shown on the video is the XOW, or “ADX Outta Whack“. The market moves with the ADX showing strength in a direction, then the market corrects a bit, then retraces part of the correction. As the market is retracing part of the correction, the ADX moves higher than it was before the correction (after a weak move registered in the opposite direction).

What the ADX is saying is completely out of what is visible in the market action and says basically that even though the market did not move farther in the direction of strength, the new motion in that direction is stronger than when the market was farther in that direction. For Forex Traders this XOW setup is a fantastic trading opportunity that doesn’t show itself very frequently.

It’s shown in the video so you can see it. AND, coming next week will be more ADX training videos, but with real charts instead of me hanging out at home with my white board.

So if you have any questions, please ask. Any comments? Leave ‘em. I’ll get to your question or comment pretty quickly. And if you want a LOT more useful info, I’ll have a secret area of this site available only to you if you leave your name and email address. Inside will be even more killer, more structured info and non-youtube videos, audios, and training ability. (There will definitely be a free section of the “Inner Sanctum” of DominationTrading.com - but that won’t be up until into August, 2008.

Let me know what you want more of so I can give it to you. Please, dear Forex Traders, let me know what you want to know and I’ll be more than happy to provide it if I can. Trade with greatness.

I’m going to say the same things in the four basic rules of trading in different ways. Repetition is the mother of skill. Action, doing, is the father of skill. Every successful trader who has been around more than a decade follows these rules of trading. Many Forex courses seem to like to ignore at least two of the rules; some only one. But all the forex trading rules here, faithfully followed, will increase your probabilities of success.

Caveat: The trading rules are much easier said and explained than done.

Part of The Almighty “They” says that trading is risky/dangerous. It’s even required by law to tell everyone that in any advertising or material related to trading markets. Trading is risky and dangerous and before you ever trade with real funds, funds that you can afford to lose, you should consider and understand all the risks involved. That said…

1. Trade with future strength / Trade in the direction of future creation / Trade with the trend.
2. Cut your losses short and quick.
3. Let your profits run and multiply as safely as possible.
4. Manage risk, money and profits by managing your trading system.

The four rules of trading are really three rules, and a fourth rule that says to follow the first three rules with control. Pretty interesting, huh?

The Four Basic Rules of Trading Forex Successfully (In their order of execution)

1. Trade with FUTURE STRENGTH, the direction of future creation - also known a “trade with the trend”.

If you have ever realized that “everyone” is “always” wrong, and then looked at the way the classic statement of this rule reads, you’ll realize that everyone is, indeed, too frequently wrong. The classic statement of this rule is “Trade with the trend.” You’ve heard that “the trend is your friend”, but have you ever had a ‘friend’ turn on you? It’s not a good feeling.

Trends end, and by the time everyone realizes that a trend is a trend, it reverses. Friends can be tricky, trends can be tricky. It’s one of those things that “everyone knows”. So don’t do it unless it is the direction of future strength.

When you get to more of the chart reading portions of this system, the statement of trading with future strength, which is the direction of future creation, will make a lot more sense to you. You’ve already seen some of it with the divergences, but there are interesting sequences that will be given in the coming memebers area.

Be sure you study this whole site several times through. New things will be continually added - practically every day for quite a while.

You’ve got to figure that’s what the folks with the most money do, so you should, too.
We further elaborate on this rule by only trading strengthening legs of moves or trends. We almost only trade such future strength trades, with the rare multi-chart weakenss trade exactly according to the line-ups sections (in the coming members area).

We only add positions, if we do, on strengthening ends of legs or trends, never on the weakening end. In trading strengthening moves or trends, we must have future strength in the direction of the move or trend, combined with past weakness.

Smaller chart weakness without larger chart strength above are not trades until the market has proven with smaller chart “line-ups”, or “time synchs”, that the move or new trend has started strengthening. Trading weakness without strength above them is a direct violation of trade with future strength. There is only one exception to that, and you will learn of that exception in the line-ups, time synchs, section of the training.

It is best to enter the market by placing market orders, or by making the market prove it really does want to go that way by placing a stop order beyond the previous market peak in the direction you want to trade. (We will cover strategies for when to do all of the above.)

Limit orders are only used to ensure that you are out of a winning position at a certain price point.

2.Cut your losses short and quick.

Look, if you’re wrong, you’re wrong, admit it fast and look for another trade or another market to trade. To preserve and protect your capital with the least risk, you have to be willing to lose because you will not be perfect in trading the markets. Perfection is an absolute and in this universe, absolutes are not attainable.

So if you’re going to lose, lose just a little bit. If you’re following the chart reading system given herein, then you’ve got more to learn about time. That’s all it means. I don’t have it down perfect in real time, and I continue to get better as I go. The principles just don’t fail. But we all can make mistakes in our reading. We can all make good trades, too. Even with the flip of a coin.

Don’t get too attached to any given trade. Some setups are prettier than others, some moves are better than others. It’s just a fact, like the fact that prices fluctuate. Just a fact.

One observation that I have made in all unsuccessful traders, including myself just a few years ago, is the unwillingness to accept a small loss, combined with the unwillingness to accept a large gain.

The two seem to go hand in hand. If you have to lose big to accept the loss and finally bail on your position, then the odds are very good that you will only be able to accept a win if it is small. I’ve seen it too many times. The corollary also seems to hold: If one is willing to accept a small loss, then one tends to be able to accept larger gains.

I do know of one successful trader who can accept large losses and large gains. He happens to hold the official world record in trading, too. Larry Williams is the man. So he’s the one exception that I am aware of to that. I don’t know exactly why it seems to hold so well in nearly everyone else, but it just seems to work out that way.

Everyone I know who has lost in the markets has lost because of a few very large losses. Everyone I know who is doing well in trading is willing to accept small losses, and does make small gains, but also has the occasional very profitable winning trade. This rule of cutting your losses “short and quick” is huge. You must always know where your bail point (stop loss) is before you place your trade, and you must always stick to it, no matter what.

Money is an idea backed with confidence. Money is not an idea backed with hope. Money is not an idea backed with fear, greed, prayer, grief, terror, paralysis, pain, yelling at the computer monitors or anything else but confidence in its various forms. Money is an idea backed with confidence.

Confidence is knowing direction, taking responsibility, controlling the trade – including taking a relatively small loss if you “knew wrong,” and confidence is being a successful trading system manager before you ever place real funds on the line, then continuing to exactly follow your system and the rules.

As soon as your order to enter the market gets filled, you place a stop loss order. That is how you fill this rule. Where you place your stop is up to you, but a good guideline is either at a fixed amount that is less than 5% of your capital, or just beyond the previous market peak against your position, whatever the situation demands.

3. Let your profits run and multiply as safely as possible.

The old statement of this rule is to let your profits run. Well, with good money and profit management, your profits should also multiply, and do so as safely as possible. I’ve seen too many traders who are over 80% accurate in their predictions lose money, over and over and over. Even if they do what they can to cut their losses short, and even let their profits run, they don’t ever do very well over time.

What’s different in real and effective money management is the multiplication aspect, combined with safety. We will cover that in more detail soon enough (in the coming membership area - you’ll have free access to part of it simply by giving me your name and email address above and to the right), but your risk and money management system must have the benefits of systematic multiplication of profits while maintaining the relative safety aspects.

Too many traders will have a good trade, then lose the profits from that trade when the market channels, then lose more when it breaks out of the channel on the wrong side. There’s more to risk and money management than just the letting your profits run and multiply – you also have to do so in a manner calculated also reduce risk in case you are wrong, and produce superfluous abundance of profits when your are right. And do so in a manner calculated to be as safe as possible in markets.

No matter how good the chart reading system, there are different levels of application based on each individual trader of that chart reading system. What if you’re wrong? What if you read the charts right except for one thing, and that one thing is what matters the most for that particular trade’s timing? That one more move because, for example, you overlooked the weakening end of a trend (as given later in the membership area) can be the difference between profit for the week or month, and loss.

So you want to let your profits run, you want to let your profits multiply, and you want to do so in as safe a manner as you possibly can to accomplish the goals of trading.

As you become profitable in a position, move your stop just beyond the opposing peak of the market realignment periods (corrections, retracements…) Make sure that as you raise your stops, you also cancel your previous stop orders.

The major component in this is the definition of money, “an idea backed with confidence.” When you lose confidence in a trade, immediately bail on the trade, or at the very least move your stop tighter. When you see a move is about to end, bail then or move your stop tighter. When you have certainty that the move is done, then you close your position.

Always keep in mind that once you are profitable, especially when you can’t lose money on a trade, if you close out on your position you have made money in the market.

4. Manage risk, money and profits by managing your trading system

The funny thing about managing risk is that it is basically saying follow the three rules, in sequence, for any trade, for any add-on to your position. In other words, follow the first three rules of trading!

So we have Rule 4 saying to follow the first three rules: Trade in the direction of future strength, or trade in the direction of future creation; cut your losses short and quick; and let your profits run and multiply as safely as possible.

It’s a sequence. FIRST you enter your trade in the direction you know that the market is going to move or trend. THEN you place your predetermined stop-loss, or you do so in the entry order if your trading platform will allow it. THEN, when you can’t lose money (except in the case of a disaster), you let those profits run. You repeat that cycle with add-ons to your position, too.

So you enter, place your stop, let it run.

Enter with an add-on, place your stop on that part of the position, let it run.

Enter with another add-on, place your stop on that part of the position, let it run.

Move all your stops when your system says to do so.

Exit portions of your position at predetermined points if/when your system says to do so.

Tighten your stops on all open portions of your position if/when your system says to do so.

Yes, there may be more considerations in real time, and we will cover some of that later, but for now, REALLY understand that managing your risk and money and trading system is following the first three rules, in sequence, over and over, combined with your ability to manage, to control your own actions.

By following the above rules, you are managing risk as much as possible in this “risky” tool of trading. (This rule also includes Money Management, which is another section with another handout.) So, basically, Manage risk is saying to follow the previous three rules. So it boils down to the first three rules, and is reinforced by another rule saying to follow the first three rules.

Summary of the 4 Basic Rules of Forex Trading

The goal of playing any game is to accomplish what you want to accomplish, to do what you really want to do, to have what you really want to have. If you are really playing the game of trading to win, to profit in a big way, to live the life you really want, then you absolutely must follow the four rules of trading.

When your chart reading system tells you the direction of future creation, future strength, then you only enter in that direction. You place your predetermined stop-loss so you definitely know when you are wrong and cut those losses short and quick. Then, when you are right, you add more safety to the overall trade as the market moves in your direction, and add trades to your overall position. Each add-on to your position is in the same direction as your initial entry, and contributes to the further creation of the trend or move that you saw coming.

So your risk and money management system must follow the four rules of trading.

Above all, it is the disciplined application of a complete system that makes traders successful. Discipline encompasses patience. Discipline encompasses every other so-called trait of successful traders, like total responsibility for your own actions and mistakes, like sticking to the system despite your own opinions, like not listening to what the almighty “they” has to say.

Part of the almighty “they” includes experts and gurus. Be your own guru. Be your own expert. Don’t ever blame the almighty “they” who “control the markets” because “they” really don’t. The Almighty “They” is the complete group of traders who are actively trading and creating market direction. A few of the bigger traders are assigned as “they” by the other group called “we”. Further distinction is made later on.

Disciplined application of a proven profitable system is the hard part. What you will have access to here is a proven profitable complete system. The “disciplined application” part, well, that’s on your shoulders.

The principles are timeless. Only the market dynamics change, and the market dynamics consist only of the various characteristics of any given trend or move. And yet the principles can be seen to work over and over despite the dynamic changes in markets.

It then becomes a question of knowing how to think with the principles. That is where the work comes in, where doing what nobody else will do comes in. That is where you handwrite your “book” every day on the charts with that day’s action for ONE market. Front and back you should write, and do so every trading day for at least 6 months. Every chart you use in your trading system. The system can’t be outsmarted. The system can only be standardly applied or not applied.

Note: There will be no forex training videos this weekend. We’ve got our quarterly “fun weekend near home” planned.

If you have any questions, please ask your trading questions. I love answering questions about trading currency. Have a great weekend!