ADX+SAR solution
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In the trading world, I often find myself facing this ongoing challenge: buying the stock after it breaks the resistance area and seems to continue rising, only to be surprised by its quick return below resistance again. I know I shouldn't buy in a resistance area or in a sideways area, but I should follow the upward trend using tools like "price action", momentum, the Relative Strength Index (RSI), and the Moving Average. However, market movements can sometimes be deceptive, making it difficult to execute these rules accurately.
When the stock breaks resistance and achieves the expected target, it seems like it will continue its upward path. But what happens next is the unexpected reversal, where the stock returns below resistance. Here, I find myself in a difficult position, especially when support is far away, making it hard to re-enter or re-buy at nearby levels, as entering in these cases carries the risk of a downturn.
So, what is the solution?
1. Focus on confirmation before buying: Instead of relying solely on breaking resistance, I can look for additional confirmation signals. This is where using more tools like the MACD indicator and ADX indicator comes into play to confirm the trend. I can monitor these indicators after the break to see if the upward trend is genuine or just a temporary break before a return.
2. Dividing investment positions: Instead of entering all liquidity at once, I can divide my buying positions, buying part at the break of resistance and waiting for confirmation to complete the rest of the purchase. If the stock returns below resistance, I have reduced the risks.
3. Using "Trailing Stop": To secure profits if the stock rises after purchase, I can use the trailing stop tool, which protects gains by adjusting the stop loss upward with the price rise, limiting losses if it falls back below resistance.
4. Avoid trading in high volatility areas: In some cases, certain stocks may have high volatility, where the stock repeatedly breaks resistance without a clear trend. In this case, it may be better to avoid trading in this stock until the overall trend becomes clear.
5. Be patient and manage capital wisely: Patience is essential, as I can wait to confirm the support return for the stock after the break, and if support is not nearby, I don’t need to rush in.
Understanding and using technical indicators better
When trading, I rely on a set of technical indicators that help me make buying and selling decisions with greater confidence, including the Average Directional Index (ADX), along with other indicators such as the MACD indicator, the Relative Strength Index (RSI), and the Moving Average. Here’s how to read and understand these indicators to determine the trend and potential strength of price movement.
1. ADX Indicator - Average Directional Movement Index
The ADX indicator is one of the important indicators that gives an idea of the strength of the current stock trend, but it does not determine its direction up or down; it only focuses on the strength of the trend and is commonly used with the following values:
When the ADX reading is above 25: this indicates that the trend is strong whether upward or downward.
When the ADX reading is below 25: this indicates a weak trend or a sideways movement without a defined direction.
When I notice that the ADX value is above 25, it gives me more confidence to enter the prevailing trend, whether upward or downward, depending on the current stock direction.
2. MACD Indicator - Moving Average Convergence Divergence
The MACD indicator is used to determine momentum as well as buy and sell signals:
MACD line (fast line): Represents the difference between the 12-day and 26-day moving averages.
Signal Line: which is the 9-day moving average.
Zero line: When the MACD is above zero, it indicates that the trend is upward, and vice versa when it decreases.
When the MACD line crosses above the signal line, it is considered a buy signal, while if it crosses below, it indicates a potential downturn and a sell signal.
3. RSI Indicator - Relative Strength Index
The Relative Strength Index is one of the most used indicators to determine overbought or oversold conditions:
When RSI is above 70: this indicates that the stock is in a state of overbuying and may face selling pressure.
When RSI is below 30: this indicates that the stock is in a state of overselling and may face buying pressure.
I use RSI to determine the right moment to enter or exit the stock. If the RSI is close to 70, I consider selling, and if it is close to 30, I see it as an opportunity to buy, especially if it aligns with other indicators confirming the trend.
4. Moving Average - Moving Average
The moving average serves as a reference to determine the overall trend of the stock over a certain period:
Short moving average (such as the 20-day moving average): gives signals for short-term trends.
Long moving average (such as the 50 or 200-day moving average): Helps identify long-term trends.
When the price is above the moving average, the trend is considered upward, and vice versa when the price is below the moving average.
How to use these indicators together
To achieve more accurate readings:
If the ADX is strong (above 25) and the MACD is in an upward crossover with the signal line and RSI exceeds level 50, this gives me great confidence to enter the trade with the upward trend.
And if the ADX is strong and MACD is in a downward crossover with RSI below 50, this indicates a strong downward trend, making me choose to sell or exit.
In addition to SAR points 5 minutes
By combining these indicators, I can make decisions based on comprehensive data and strong analysis, which helps me reduce risks and enhance profit opportunities.
Disclaimer: Includes opinions from third parties. Not financial advice. May contain sponsored content. Please review the terms and conditions.
