The Average Directional Index, also known as ADX, is a technical quality indicator that measures the strength of a trend.
The indicator represents the average of the increasing values in the price range.
This guide will delve into is what the ADX indicator does, and what you can do to make it conform to it.
What is the Average Directional Index indicator?
The indicator uses the +DMI and -DMI lines and the ADX to determine the strength of the price movement.
It can be plotted with only one line, ADX, whose values range from 0 to 100. ADX is non-directional, it records the strength of the trend without regard to price direction. Generally speaking, ADX is the best indicator of the trend.
The calculation of ADX is based on the average of the movements of the price behavior. Oscillators usually consist of 3 different lines. They can be used to determine whether a trade can be short or long, or whether you should stay awake to the trade.
In essence this means that, in essence, the average directional index can be used to predict whether or not a trade is trending. This prediction can help traders decide whether to use a trend following system or a non-trend based strategy.
How do I use the Average Directional Index indicator?
The main purpose of this indicator is to help you determine what the current strength of this pattern is.
The rise of the positive indicator of direction (+DI) marks the strength of the current trend. However, the strength of the downtrend is indicated by the indicator being negative (-DI).
It is a fact that there is a significant trend when ADX exceeds 25. However, when it is below 20, it is a signal that there is no trend.
If the ADX starts to fall from its high, it is a sign that the trend is coming to an end.
If the ADX is falling, it may indicate that market activity is less directional and that the current trend is slowing down. When the trend shifts, it is possible to be wary of a trend-based trading approach.
A crossover signal between the +DI and -DI lines is also beneficial. If the +DI line crosses the -DI line and the ADX exceeds 25, it is considered as a buy signal. When the -DI is above the +DI line and the ADX exceeds 25, most traders will choose to go short.
Average Directional Indicator Trading Strategy
If your +DI is just greater than -DI, then the market is usually in an uptrend and you are able to go long. When the value of -DI is greater than +DI, this means a decline.
ADX Buy Setup
+DI must cross over -DI
Be patient and wait until the price trend changes to bullish.
Set a stop loss close to last month’s low.
Exit when the direction shifts and +DI falls below -DI.
ADX Sell Setup
-DI must cross +DI
Watch until market price changes to bearish
Set a stop loss at the nearest high.
Exit when the direction changes and the price drops below +DI.
ADX is a useful tool for assessing the overall trend strength. As with other indicators, it is recommended to use it together with ADX to verify the direction of the trend.