I have been trading cryptocurrencies for nearly 11 years, starting with 300,000 and reaching 37,000,000, and now achieving financial freedom. My biggest realization is: simplify complex events and repeat simple tasks! When you reach the top of the mountain, you will have an epiphany. Today, I share my insights with those climbing up the mountain below, hoping that the content of the article will help you understand the truth and essence of the crypto world!
Have you heard the story of the chessboard and the grains of wheat?
Sita invented chess, and the king was very happy and promised him the reward he requested: to place grains of wheat on the chessboard in a multiplicative manner. The total number of grains required is 18446744073709551615... How many grains of wheat are there exactly? For example, if a warehouse were built to store these grains, and the warehouse is 4 meters high and 10 meters wide, then the length of the warehouse would be twice the distance from the Earth to the Sun. And to produce this many grains, it would take the whole world two thousand years.
Even with a small amount of capital, as long as it can steadily generate profits, it can eventually grow into astronomical figures. Therefore, small capital does not need to be too impatient; find a position management method with low drawdown, then find an opportunity to leverage slightly, first survive in the market, and then patiently accumulate. One day, your warehouse will be filled with grain.
Trading requires safety; try to make fewer big mistakes, relying on patience to accumulate wealth year after year.
Patience in learning will lead to success.
In the stock market, following the market makers is a deep knowledge. As stated in 'The Art of War', 'Know yourself and know your enemy, and you will never be defeated.' If retail investors want to profit from following the market makers, they need to comprehensively grasp the entire process of the market makers' operations, carefully observe every detail, and timely perceive new movements of the market makers.
As Peter Lynch said: 'Investing without research is like playing poker without looking at the cards; you are bound to fail.' For retail investors, if they can guess the market maker's thoughts, understand their methods, and see through the technical characteristics of their operations, they can formulate targeted following strategies. Profiting from following market makers is not something that can be achieved in one or two days; it requires serious study of relevant knowledge, mastering the rules of market makers' operations, and continuously improving understanding of the stock market and market making to refine their operational philosophy and skill.
The content to be shared in this article is: ATR indicator and DM value tactics!
The full English name of DMI is Directional Movement Index, and it is known in Chinese as the DMI trend indicator, DMI index, or DM indicator. It was invented by the American technical analysis master J. Welles Wilder in 1978.
In addition, the DMI indicator is also known as the ADX indicator; ADX is short for Average Directional Movement Index.
DMI and ADX are completely consistent in their settings and usage, so many charting software's indicator lists will only show one of the two.
The principle of the DMI indicator is to measure the relationship between the average upward movement of the market, the average downward movement, and the average volatility, to assess the strength of the market trend and find trading opportunities.
ATR indicator and DM value
Before further explaining the DMI indicator, we need to introduce the concepts of ATR indicator and DM values, which are both part of the DMI indicator.
1. ATR indicator
The ATR indicator is short for Average True Range, and its full Chinese name is the average true volatility, also created by J. Welles Wilder.
As the name suggests, when calculating the average true range, we first need to calculate the true range, and then apply a moving average to the result. The true range of the current candle is the maximum of the following three values:
The distance between the current candle's highest price and lowest price;
The distance between the closing price of the previous candle and the current candle's highest price;
The distance between the closing price of the previous candle and the lowest price of the current candle.
After obtaining the value of the true range, applying a moving average gives the value of the ATR indicator.
Assuming we want to calculate the ATR indicator value for a period of 14, the calculation formula is:
(The sum of the true volatility of the previous 13 candles + The true volatility of the current candle) / 14
From the calculation formula above, it can be seen that the larger the value of the ATR indicator, the greater the market volatility. In many chart software, ATR can be selected as a separate indicator to indicate whether the market is in overbought or oversold levels. Short-term traders can refer to it to find exit timing, while long-term traders can use it over longer time periods to judge when trends might adjust.
For example, in the chart below, the high point of the ATR indicator marked by the red box shows that after reaching the peak, the corresponding K line trends all experienced pullback consolidations.
2. DM value
DM stands for Directional Movement, known in Chinese as Directional Movement Value, which can be +DM (upward movement) and -DM (downward movement)
+DM = Current candle's highest price - Previous candle's highest price
-DM = Previous candle's lowest price - Current candle's lowest price
Note: Whether +DM or -DM, the value must be greater than or equal to 0; if the calculation result is negative, change the value to 0. The larger the DM value, the stronger the market trend.
Composition and calculation of the DMI indicator
The DMI indicator consists of three lines:
1. +DI line
+DI is short for The Positive Directional Indicator, which is the upward directional index, given by the formula:
(Smoothed moving average value of +DM for the set period / Smoothed moving average value of ATR for the set period) × 100
For the concept of moving smoothing, please refer to the explanation in the EMA line of the MA moving average line usage tutorial.
ATR represents the average market volatility, +DM's moving average represents the average upward movement of the market, and the +DI line reflects the ratio of the average upward movement to the average market volatility, indicating the strength of the upward trend. The final multiplication by 100 is to better display the value on the chart, and +DI values will fall between 0 and 100.
2. -DI line
-DI is short for The Positive Directional Indicator, which is the downward directional index, given by the formula:
(Smoothed moving average value of -DM for the set period / Smoothed moving average value of ATR for the set period) × 100
-DI line reflects the average downward movement of the market in relation to the average market volatility, indicating the strength of the downward trend.
3. ADX line
Before calculating it, one must first calculate the DX value (Directional Movement Index), which is given by the formula:
DX value = [(+DI minus absolute value of -DI) / (+DI plus -DI)] × 100
ADX value = Smoothed moving average value of DX values within the set period
From the formula above, it is clear that the ADX line can be used to measure the strength of the trend, but cannot confirm the direction of the trend.
Application of the DMI indicator
Application of ADX – Judging trend strength
It is generally believed that when the ADX value is below 25, it indicates that the market is in a range consolidation. The higher the ADX value, the stronger the market trend.
In the case shown below, the lower half of the chart is the DMI/ADX indicator window. It contains three curves: the blue ADX line, the yellow +DI line, and the red -DI line. A red horizontal line is also added to mark the indicator value of 25.
It can be seen that the ADX line clearly runs below 25 three times; we have marked these three parts with yellow boxes, and also marked the corresponding K line trend sections with yellow boxes. It is evident that the corresponding K line trends are all in narrow range consolidations.
+DI line and -DI line crossover application – Confirming entry timing
When the +DI line crosses up through the -DI line, it is a buy signal;
When the +DI line crosses down through the -DI line, it is a sell signal.
Traders can refer to the ADX line simultaneously to help confirm signals; regardless of the crossover situation, if the ADX line is also moving up, it indicates that the signal is stronger, suggesting greater potential for upward or downward movement in the future.
It should be noted that the crossover application of +DI line and -DI line is only applicable in trending markets, and its effectiveness is very poor in range consolidation markets.
For example, the K line on the right half of the chart is clearly in a range consolidation; at this time, the corresponding +DI line and -DI line are entangled, and their crossover loses its reference significance.
DMI divergence
The DMI indicator also has divergence, which can be divided into high divergence and low divergence:
High divergence
The market price makes a new high, but neither the +DI line nor the ADX line follow to create a new high, indicating that the market may be topping.
Low divergence
The market price makes a new low, but the -DI line does not follow to create a new low, indicating that the market may be bottoming.
For example, the part marked with a red diagonal line on the left side of the chart is a case of high divergence, which quickly led to a price reversal and a significant pullback; the red diagonal line on the right side is an example of low divergence, which subsequently led to a significant price increase.
DMI indicator parameters
Most charting software defaults to a period of 14; traders can adjust according to their needs, but usually, the default parameters can be used directly. The smaller the period parameter, the more sensitive the indicator is to price changes, but the more false signals there will be; conversely, the larger the period parameter, the less sensitive the indicator is to price changes, but the higher the reliability.
In the indicator settings window, traders can also set the colors and thicknesses of the ADX line, +DI line, and -DI line.
Disadvantages of the DMI indicator
The DMI indicator is a lagging indicator, as its calculation process involves multiple smoothing; the more smoothing iterations, the slower the indicator value responds to price changes. Therefore, the DMI indicator is suitable for medium to long-term trading strategies, and is not suitable for short-term trading.
In addition, many traders combine the RSI indicator with the DMI indicator, as the RSI indicator is very sensitive to price changes, thereby offsetting the lagging disadvantage of the DMI indicator.
The final shared ironclad strategy can be saved for learning.
1. In the domestic market, if there is a continuous drop during the day, one must bottom-fish, as at night at 21:30 foreigners will drive up the price.
2. If there is a big rise during the day, definitely do not chase the high; it will drop back at night.
3. The key factor signal for buying and selling is the pin, the deeper the pin, the stronger the buy and sell signal.
4. Major meetings or favorable news will lead to price increases, but will drop once the news is out.
5. Group discussion plan, the community promotes the purchase of coins, speaking glowingly; you are excited, most likely to be trapped and operate in reverse. Which coin is hot? Very hot. You can short it immediately.
6. Recommended by group friends, if you think it’s not interesting, it’s very likely to take off; when you have doubts, it might be a good idea to try a little.
7. When you hold a large position, you will definitely face a margin call; why? You are just on the exchange's focus list for margin calls.
8. After your short position hits the stop-loss, it will definitely fall; if it doesn't trick you into exiting or blowing you up, how could it fall? For example, TRB.
9. When you are about to break even, just a little more, and the rebound suddenly stops; how could it let you close and escape?
10. When you take profit, you are being played; if you don't exit, how can you drive up the price? The vehicle is too heavy.
11. When you are excited, the waterfall arrives as scheduled; your excitement is also a trap set by the market makers.
12. When you are broke, every project is on the rise, making you FOMO and rush to enter the market. So you understand that the market is manipulated with over 80% probability; you must control your position and certainly take the initiative. Clearly, do not enter the market until you are sure of the market maker's operations; once you enter the market, you are just meat on the chopping board. Trading is a test of patience, determination, and timing.
Finally, remember:
The cryptocurrency space is a marathon; stability is far superior to quick wins. Gains obtained through luck will ultimately be lost due to lack of skill. Only by integrating position management into instinct can one survive in a harsh market.
Remember: as long as you are alive, you have the right to wait for the next round of reversal.
No matter how diligent the fisherman, they will not go out to fish in stormy weather, but will carefully guard their boat. This season will pass, and sunny days will come! Follow me, and I will teach you how to fish and how to fish better. The cryptocurrency world is always open; only by following the trend can one lead a life in accordance with the trend. Save it and keep it in mind!
