Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Market Strategist at CMS FX. Again, welcome to another lesson in learning how to use technical analysis. As always, these lessons are simply for information and educational purposes only.

In this lesson I want to teach you how to trade on the right side of the market. We often hear from many old classic textbooks always trade on the right side. What does that actually mean? Well in this lesson we'll take a look at how to be on the correct side of the market.

Now what I want to teach you today is how to use something called the DMI and that's the Directional Movement Index, or in some cases, Directional Movement Indicator.

The DMI is a moving average of range expansion and what that means is as the market itself, because there are two stages, the markets will either contract or expand and when they're expanding, the prices are getting wider and wider and that's really where the DMI comes handy towards the tool of trading itself. Now the plus DMI is a measurement of how strongly prices move upwards and the minus DMI measures how strongly prices move downwards.

So here is what a DMI looks like. You'll see that there are actually two lines. Don't worry, it appears confusing at first but as we progress through you'll see how really effective this indicator can be. Notice the two colours. We have blue and red and really what we're looking for is to see which colour or which indicator, whether it's the plus DMI or the minus DMI, is towards the upper channel. So on the very right hand side we can see right now that the red, or the minus DMI, is actually trading towards the top side and that would suggest that the current trend of the market is bearish. Prior to that, we had the blue, the plus DMI, trading towards the upside. It was actually above the red at 0.1 and that would suggest that the trend is bullish.

So let's apply this theory to a chart. So we have the FTSE 100 daily chart here and you can see from point one over here where we have a blue arrow as well, that the positive DMI had crossed above the negative DMI and prices were starting to trend towards the upside. As you can see, we captured quite a nice move and then we got to point two and there are two red arrows because the first one, that's where the negative DMI crossed below the positive one, so that had given us a sell signal. But I'll explain that in further detail on the next chart or two.

The second arrow, again we had a second sell signal which is the one we would have taken. So again, we've seen a nice move towards the downside. Notice however, that the red indicator, the minus DMI, is trading towards the upside but the market is falling lower. That is only telling us that the current trend is bearish.

Now previously I said to you we would take the second position and not the first one, why? Well there are many ways that we can enter the markets. We had a condition to say that the market could be in a bearish position. We now need a trigger. The first arrow indicated where the negative DMI crossed above the positive DMI suggesting that the trend is going to be turning bearish. But notice that the green line suggests that the market really should have taken out that price bar, which it didn't, so it didn't trigger us into a sell position.

But the second time it actually occurred, the following day, the market actually broke below the low of that price bar suggesting that we now have a confirmation that the move could take place towards the downside and we had actually placed our stop just above the price bar there if triggered, which it actually did. So what you can see straight away is that the negative DMI is towards the upper side of the channel suggesting that we're in a bearish trend and then the market has actually fallen, so that's quite a nice trade there and that's currently the state of the FTSE 100 Index.

Now here we have the FTSE 100 Index but the difference is on this particular chart I've actually added another line. So on the positive DMI and the negative DMI there's a green horizontal line running right across. Now that line has been set to 25. What I'm really looking for is any of the indicators, whether it's the positive or the negative DMI, to be above the 25 line. So at section one over here we can see that the blue was almost above the 25 line. In fact it was about two points above that line, so that would have initiated a buy signal. So we had a move just over here, but the market didn't take out the high, so that trade we didn't actually accept.

The second time it actually occurred, just over here, we had a second buy signal and the market moved above the high of that price bar taking us into the trade. As you can see, the market moved quite swiftly towards the upside and then of course further on we had the negative DMI crossing above the blue one and above the 25 line and of course the market has fallen, so that has worked quite nicely.

So look to see which DMI is on the top side of the channel; whether it's the positive or the negative. That will suggest that the current trend would be bullish or bearish and the bulls and bears are determined by the crossover itself as well. So obviously you want to see the crossover take place and wait for the DMI to be above the 25 reading there because that will suggest that the trend is getting stronger and always use stop loss orders to protect your capital.

We hope that this lesson has been useful to you and we look forward to seeing you at the next lesson in CantosCharts Masterclass. This is Sandy Jadeja. Have a great trading week.