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Main » Articles » Trading Strategy

Directional Movement Index and Parabolic SAR

Sent by: Svetlin Minev

DMI and Parabolic SAR are very efficient trend indicators and are used often by traders for developing of their strategies. These indicators could be used separately and in combination with other technical studies. The DMI system is plotted by three lines: ADX, +DI and -DI, and could be used for generating of signals or trend filter:

Rising ADX shows that the market has a clear direction and is in a trending mode;

Declining ADX shows that the trend is losing steam or the market is in consolidation phase;

When ADX is above 20-25, the market is in a clear trend.

DMI system generates the following signals:

Rules for long position

1. ADX is above 25 and rising;

2. The Parabolic SAR goes form below to above the chart of the price. The bar when this happens is marked as Signal bar.

3. Long position is initiated when the price breaks 2-3 pips above the high of the Signal bar.

4. After the position is open an initial stop loss order is placed 2-3 pips below the low of the signal bar.

5. A limit order is placed according our Money management rules.

Rules for short position

1. ADX is above 25 and rising;

2. The Parabolic SAR goes form above to below the chart of the price. The bar when this happens is marked as Signal bar..

3. Short position is initiated when the price breaks 2-3 pips below the low of the Signal bar.

4. After the position is open an initial stop loss order is placed 2-3 pips above the high signal bar.

5. A limit order is placed according to our Money management rules.

Indicator chart

Directional Movement Index and Parabolic SAR

http://forexsb.com/strategies/str_dmi_psar.html

Category: Trading Strategy | Added by: forex-market (2009-10-15)
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