Forex Trading System- Direction

OVERVIEW

We wish to clarify that there is no intended correlation between our arbitrary defin-ition of direction and that of J. Welles Wilder, the noted trader and author of the 1970swho developed the Average Directional Index (ADX), which uses a positive directionalindicator and a negative directional indicator to evaluate the strength of a trend. Furtherinformation on Wilder’s method can be found in his highly acclaimed book entitled New
Concepts in Technical Trading Systems (Trend Research, 1978).

DIRECTION CHART

Like its sibling counterpart the activity oscillator, the direction oscillator is unique to currency markets or more accurately, unique to those financial markets where the number of upticks and downticks for each time interval is recorded and readilyaccessible.


Due to its ratio nature (dividing the difference by the sum), this indicator can oscil-
late between +100 and –100, as expressed in the lower right vertical scale of Figure 3.3.
It is not, per se, a volatility indicator, although sharp incursions into the extremes(say above +50 or below –50) imply an increase in volatility. Instead, it serves as a trendconfirmation indicator.

We note that Figure 3.3 employs a one-minute time interval while Figure 3.4 usesa one-hour time interval. From this we determine the following rule: As the time in-terval increases, the absolute magnitude of the direction oscillator decreases. Al-though the direction oscillator has potential in unraveling a currency pair’s hiddenbehavior, it should not be used as the sole criterion in justifying a market entry sig-nal. We intend to delve a lot deeper into its analysis. One important aspect to note about the direction oscillator is that the magnitude of its deviation from the meanline of zero is not necessarily most significant. Rather it is the length of time that itstays above or below the zero mean.


DIRECTION MERCURY CHART

Figure 3.5 compares the direction of the current bar with the direction of the previousbar. If the direction has increased, then the current bar is left empty. If the direction hasdecreased, then the current bar is shaded.

One interesting phenomenon is the instance where the high and low of the currentday are both greater than the high and the low respectively of the previous bar yet thedirection of the current bar is negative. The study of direction for one-minute intervalshas potential.


ACTIVITY-DIRECTION MERCURY CHART

In order to take full advantage of the mercury chart concept, we combined the OHLCquote data, the change in activity, and the change in direction into a single chart.

Each vertical bar is divided into two equal parts and shaded according to the fol-lowing rules :
A—If the current activity is greater than the previous activity, then the upper half ofthe bar is left empty.
B—If the current activity is lower than the previous activity, then the upper half ofthe bar is shaded.
C—If the current direction is greater than the previous direction, then the lowerhalf of the bar is left empty
D—If the current direction is less than the previous direction, then the lower half ofthe bar is shaded.


CONCLUSION

We feel that the chart in Figure 3.7 is the most important variation of all the mercurycharts presented in this book because of the amount of information that has been com-pressed into a single vertical bar chart.