Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Market Strategist with CMS FX. Welcome to another lesson in technical analysis. As always, this is simply for information and educational purposes only.

Over the last two lessons we've learnt how to use the ADX and in the next lesson we learnt how to use the positive and negative DMI. In today's lesson I want to teach you how to combine the two together to see if we can get improved results. So today's lesson is using the ADX and the DMI together.

So we want to look at how to apply the ADX and how to apply the DMI to a chart and then we're also going to take a look at if we can add a moving average to get slightly better results.

Let's take a look at this chart straight away, the FTSE 100 Index. It looks a little bit complex at first, but we'll take it one step at a time.

Now there are several blue and red arrows on the FTSE 100 chart and I'll highlight what those arrows mean. But the first thing I want to do is take us to the bottom of the chart, which is where the positive and the negative DMI are located. Now at point one, the first thing we observe is that the blue line (the positive DMI) is above the red line, so that's a good sign for the bulls. The second thing is, it's trading above the 25 reading, so that will suggest a nice strong move should take place. So that's indicated by the blue arrow on the FTSE 100 charts.

Now the second point on the DMI reading at the bottom of the chart you can see that the red line has crossed above the blue and it's also above the 25 line. Now as you can see, we have two red arrows. Now the first one we had a sell trigger and there was a small move towards the downside.

Then at point three what actually happened was that the negative DMI crossed back above the 25 line, so that would have initiated a second sell signal and then again we had a follow through and moved towards the downside.

At point four we had the blue line cross above the red line and above the 25 line pointing that the market should start a rally towards the upside and of course the market did indeed.

And at point five again we have the red line trading above the blue line as well as the 25 line and notice that the market had fallen swiftly as expected.

So how can we improve this method? Well this is where the ADX reading comes into play. At all these points between one, two, three, four and five what I'd like you to do is to take a look at the ADX reading.

Now at points one and two the ADX was below the 20 line suggesting that the move might be weaker than we would like to see and of course we did see only small moves towards the upside in both the bullish play and the bearish play.

But on the third move (that's the point number three where we had a sell signal) we had a slightly better ADX reading, but there again the market didn't move significantly in our direction.

Now in previous lessons I've reminded you to use two timeframes. So although we're looking at the daily chart here, always look at the higher timeframe which will be the weekly one in this case here. So if the weekly chart is bullish, we only want to take buy signals and ignore the sell signals. If the weekly chart is bearish, then we only want to take the sell signals. So you might want to compare this daily chart to the weekly chart.

Now at point four what we notice is that the positive DMI is above 25 as well as the red one here. We have a buy signal indicated by the blue arrow, but again, notice how the ADX reading had gotten back above the 20 line with a nice steep slope towards the upside and we had a very, very nice move towards the upside.

And of course, at point five, the negative DMI is trading above the 25 line, above the blue positive DMI and of course we have a nice sloping ADX reading suggesting that the market should move towards the downside with a significant move. As you can see, it's delivered once again.

In this example here, what I've done is added a moving average. Now the moving average is a lagging indicator, but it can still be useful. So the idea is if the market is trading above the moving average and we get a buy signal, that's an added confirmation. If the market is trading below the moving average and we get a sell signal, that's another added confirmation.

As we can see, we actually had that occur at the sell signals. Once again, the market climbed above the 20 period moving average, positive DMI with a rising ADX and nice move over there.

Then of course, lastly, we had a market trading below the 20 period moving average, a nice sell signal and a good DMI reading there.

So in this example here, this is the weekly chart, you can apply these techniques to various timeframes, whether it's intraday or daily or weekly. So I would suggest that you take a look at how we applied these tools to the market of your choice on different timeframes and see what kind of results you can find through your trading methods.

So always look to see which DMI is on top - whether it's the positive or the negative one - and is the ADX reading above 20 because it should be to give you a nice good strong move and is the market above or below the 20 period moving average to give you the added confirmation. Of course, as I said, this can be used in all timeframes.

Once again I hope you've enjoyed this lesson. We look forward to seeing you in the next CantosCharts Masterclass. This is Sandy Jadeja. Have a great trading week.