Option trading can be fun, exciting, and profitable, but it can be full of frustration and losses. Have you ever noticed how frustrating it is to see your stock bounce up and down everyday in a seemingly endless sideways pattern? Most of the time we can be so tired of a trade that by the time it really decides to move our direction, we have already jumped ship. Is there help? Can someone rescue us?
Here comes J. Welles Wilder with his Average Directional Index (ADX). It is a great indicator for determining if a stock is in a sideways pattern or likely to enter a trend. If we understand the environment we are trading in, we can plan accordingly. As option traders, the most explosive gains are had while trading trends.
How do we read the ADX?
1. A black line move above 20 indicates a strengthening trend.
2. A black line move below 40 indicates a weakening trend or probable sideways environment.
3. Trend direction when a move above 20 occurs is indicated by +DI and -DI.
4. When the + DI is above the -DI, a positive trend is likely.
5. When the -DI is below the +DI, a negative trend is likely.
6. The DIs are useful in trending environments. Non-trending environments create DI whipsaws.
Below is a chart of XTO with the trending environments marked.
Remember, that trading trends leads to much less frustration and higher profits. Be patient with your trades and enter the trends.  Happy Trading!
–Jeffrey S Yaede
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