Quantifying a substantial market move can be difficult.  Yesterday, during the live trading room, some asked about another methodology using Volume Spread Analysis.  My methodology is very similar to theirs and they wanted my opinion, as we both had spoke at the Wyckoff Conference in 2010.  I stated that the methodology is very sound and I thought he was a great trader.  However, as with most methodologies, experience plays an important role in his methodology.  He waits for a substantial move, then a pullback with volume divergence.  But for new traders, what is substantial?  Ten ticks, twenty ticks, thirty ticks?  This was the same issue that I faced as a new trader.

Quantifying a Substantial Market MoveQuantifying a Substantial Market Move

I was fortunate to have a really good friend that introduced me to the ADX.  The only issue was reading all those squiggly lines.  I found that reading the lines put me into an analysis mode instead of trading mode.  So I set out to figure out a way to use the information in a way that allowed me to remain in a trader’s state of mind.  The result was the THD ADX, which can help traders in quantifying a substantial market move.

Using the THD ADX, I can quantify what a substantial market move is on any market.  Then by incorporating the ATR, I can identify where the pullback will go.  This morning as I was trading the NQ and Gold, it occurred to me that the moves were a perfect example of this concept.

We had a substantial move on Gold, followed by an ADX magenta peak, with a pullback to the ATR, on diverging volume, with a low risk entry (closing in my direction).  The result:  100 ticks of profit while only risking 30 ticks.

On the Nasdaq, we had a substantial move up, followed by an ADX magenta peak, pullback to the ATR, on diverging volume, with a low risk entry (close in my direction).  That trade netted 17 points while only risking 7 1/2 points.

To watch the video on this trade, click here and then select the Gold & Nasdaq trade.