Understanding the ADX Indicator
The Average Directional Index (ADX) is a robust and highly efficient technical analysis tool that is primarily used to quantify the strength of a trend. It was developed by J. Wilder Wells in 1978 to predict changes in market trends. The ADX indicator is based on a scale from 0 to 100 and primarily focuses on trend strength rather than its direction.
How Does The ADX Indicator Work?
The ADX consists of three different lines: the ADX line, +DI (Positive Directional Indicator), and -DI (Negative Directional Indicator). These directional indicators point out whether the trend is bullish (+DI) or bearish (-DI). The ADX line is typically composed of a 14-day moving average of the expansion range. The interaction of these lines provides traders with useful information about the current market situation.
The specific level of the ADX line gives traders clues about the trend. A low ADX value (below 20) indicates a weak trend or a trading range, while a high ADX value (above 40) signifies a strong trend. The +DI line crossing over -DI signifies the beginning of a bullish trend, while -DI crossing over +DI stands for the initiation of a bearish trend.
Utilizing the ADX For Trading
For an effective trading strategy, it’s crucial to combine the ADX indicator with other technical tools. The ADX allows you to identify the strength of the trend, yet, it is essential to analyze the direction and nature of the trend too.
1. Utilizing ADX with Trendlines: While the ADX determines trends’ strength, trend lines help identify the direction of these trends. By combining both tools, one can develop a comprehensive picture of the market situation.
2. Combining ADX with Candlestick Patterns: Candlestick patterns offer valuable insights into market sentiment. When the ADX indicates a strong trend, the patterns could provide entry and exit points.
3. Applying ADX with Moving Averages: A moving average crossover strategy can work efficiently with the ADX. When the ADX shows a strong trend and the short-term moving average crosses above the long-term one, it could be a good time to enter a buy trade, and vice versa.
Key Tips for Using the ADX Indicator
1. It’s essential to understand that ADX doesn’t represent the direction of the trend; instead, it only tells the intensity of the trend. Use other technical