Most strategies or techniques in technical analysis involve the use of indicators.

But more often than not, most traders use indicators for all kinds of situations which tend to render them quite ineffective.

Just as a carpenters toolbox has different instruments which are used for different purposes, each indicator in the tool box of a trader has to be used for a particular situation.

a series of lessons we call "Know your Indicators", which introduce specific indicators, and go over the characteristics and drawbacks of the same.

First and foremost, there is one point that a trader needs to keep in mind - all indicators are lagging, and it is ultimately price which is the only leading indicator.

Indicators should be used just as they are described as "indications" for price movements and not as confirmations. While this does not diminish the importance of the indicators, one must remember that a change in price will cause a change in the indicator - not the other way round.

Indicators, nevertheless, play an important part in the building of strategies and techniques - but only if one applies them correctly.

The DMI/ADX is one of the most effective and yet underused indicators. If used with the correct parameters, it can be a very effective trading system on its own.

It consists of two components:

• The Directional Movement Indicator (DMI) is a trend-following system developed by Welles Wilder.
• The Average Directional Movement Index (ADX), is part of the DMI and determines the market trend.

When used with the up and down Directional Indicator (DI) values: Plus DI and Minus DI - the Directional Movement Indicator is considered a trading system.

The rules for using the Directional Movement Indicator are:

• You establish a long position whenever the Plus DI crosses above the Minus DI.
• You establish a short position, when the Minus DI crosses above the Plus DI.

A simple DI+/DI- crossover is an entry and exit system. However, used that way it produces frequent whipsaws.