This morning Crude Light provided a great example of not taking a trade because the criteria was not met for entering a long position using the ADX indicator to show when markets are at overbought and oversold levels.
Example of Not Taking a Trade
One of the hardest issues in trading to learn is that not being in a trade is part of trading. Why is this so hard? Because we are traders and we believe that our job is always to be in the markets. However, when the indicators or charts are telling us to stand aside, then that is also part of our trader’s job description. Crude Light provided an example of not taking a trade because the indicators were saying this is not the right time.
On the charts below, the 45 minute is on top and the 3 minute is on bottom. Notice that the 45 minute ADX line is blue and is still above 70. This indicates the market is currently in an overbought condition so you do not take any longs generated on the 3 minute. Doing so could result in you buying the high, which is not something any trader wants to do. Instead, the trader should wait for a retracement before he enters the market.
Instead, using the ADX indicator, the trader would be anticipating a retracement on the 45 minute chart to the average true range stop. This means the 3 minute will flip the average true range stop (plus sign) and it has because it went from blue to red on the 3 minute chart. Then price will return to the average true range stop to test and ensure that a resistance area has been formed. At that point, a short could be entered with the expected movement back to the average true range stop on the 45 minute chart or $41.51 (current value of the ATR stop on the 45 minute chart).
The overbought status on the 45 minute was indicating the long trade on the 3 minute chart would be a loser and the trader should bypass the trade and wait for the next setup.