ADX: The Trend Strength Indicator

If the order volume on one side rises sharply, the price starts moving upward or downward, and the indicator single line moves towards 100%. When interpreting the ADX reading, keep in mind that the oscillator is auxiliary. To confirm the signal, you need to analyze where all three lines of the index are positioned relative to each other and to the 0-100% range conditions. Below, I will describe each of the signals in detail.

Whether you are what is adx in stocks or cryptocurrencies, this guide will explain what fundamental and technical analyses are and which one to choose. If the ADX starts to drop, that could be a sign that the trend could be coming to an end or is at least weakening in strength. And if the ADX is starting to go up, that means there’s a chance that a trend is about to form or is getting stronger. We can also see that Bitcoin’s ADX has turned downwards from an exceptional high towards the end of January 2023. The indicator is beneficial for both day trading and swing trading.

ADX Indicator – Technical Analysis

Welles Wilder for analyzing commodity price charts but can be easily applied to different markets and timeframes. ADX values range between 0 and 100, where high numbers imply a strong trend, and low numbers imply a weak trend. According to Wilder, the trend has strength when ADX is above 25; if ADX is below 20, the trend is weak. As it’s possible to see there was a bearish crossover, so the -DI went over the +DI. The ADX indicator passed over the level of 25, moreover, soared to over 50. All these three lines together indicate an extremely strong downtrend in the market.

84% of retail investor accounts lose money when trading CFDs with this provider. The first technique is used to smooth each period’s +DM1, -DM1 and TR1 values over 14 periods. As with an exponential moving average, the calculation has to start somewhere so the first value is simply the sum of the first 14 periods.

However, as a day trader, you should not focus on calculating the indicator since it is offered for free. The Average Directional Movement Index indicator can prove very useful when trading. You can go long or short on a stock if you spot a breakout.

Average Directional Index Trading Strategies

Traders can easily determine whether a market is ranging or trending, and then apply the appropriate technical trading strategy. ADX belongs to the broader group of trend-following indicators. Other technical analysis indicators similar to ADX include the Parabolic SAR, Envelopes and Moving Averages. The core feature of the Average Directional Index is the ability to identify if the market is trending and determine the strength of this trend.

The Directional Movement Indicators show the actual direction or a trend. When the DMI is plotted on a chart it will plot two lines, +DI and -DI. Once you’ve figured out which way a stock’s price is going, it’s time to look at the ADX line.

However, use it in combination with other indicators to take more robust trading decisions and achieve more consistent results. It’s also reasonable to explore the opinion of industry experts as well as constantly research the market to try to predict the asset’s future performance. The Average Directional Index is a popular technical analysis tool and a widely used three-line indicator. It helps traders to find out if the market is trending and how strong this trend is. ADX may be applied to any trading instrument, including stocks, indices, cryptocurrencies, and forex.

It helps traders determine the strength and direction of a trend and may be applied to any trading instrument, such as stocks, commodities, indices, and Forex. While ADX is a seamless tool to measure the trend strength, +DI and -DI lines used in combination with it help investors identify the direction of the trend. Should the +DI line crossover the -DI line from above while the ADX line surpasses the level of 25, there is a high possibility of a strong uptrend.

Can Investors Rely on ADX?

Trade theory suggests adding trend tools to the oscillator – for example, a moving average or a combination of ADX and EMA. It is a set of MAs with different periods that show four stages of a trend – beginning, active phase, weakening trend, and flat. The ADX line gives the most accurate signals after range consolidation – when the price exits the flat range conditions. During sharp price movements against the trending market and when the main direction of price movement changes, the number of false signals increases.

The biggest profits are only obtained by using trend trading. The faster the price changes, the higher the trend strength and the more profitable and faster the transaction will be. It’s better to add other direction indicators or add Price Action elements to the strategy. At point 3, the trend direction is likely to change again — the dotted lines converge, and the index line has turned upwards. At point 4, we close all short positions if it wasn’t done at point 3 because the indicator line goes below the 20% level. Here you can see the EURUSD currency pair chart on the H1 timeframe.

The point that the arrow points to is where the +DI and -DI lines swapped. The maximum distance between + DI and -DI indicates an extremely strong trend. The greater the distance between + DI and -DI, ​​the more likely we’ll see a price reversal or temporary range consolidation soon. When + DI and -DI begin to converge again, this indicates the trend is gradually fading. DM can be of either the M value calculated during the previous step or 0, depending on whether the algorithm condition is met.

When ADX is above 25 and falling, the trend is less strong. Stop-loss is usually put at the low of the signal day. The buy signal remains in force as long as this low holds, even if +DMI crosses back below – DMI.

What is the ADX indicator?

If the lines diverge after crossing, it means that the balance of buyers and sellers is getting disturbed. If there are more buy orders, the price starts to rise, and +DI moves upward. Additional +DI and -DI lines define the trend direction.

The ADX is an oscillator which moves between defined extremes of zero and 100. A reading below 20 indicates a weak current trend, while a reading over 40 suggests strength. What is important to remember is that whatever reading the ADX gives, it only indicates the strength of the existing trend. It does not indicate whether said trend is bullish or bearish – that is for you to confirm by looking at the share price chart. Readings above 40 can be both bullish and bearish, depending on the direction the shares are moving.

The average directional index is used to determine when the price is trending strongly. After all, the trend may be your friend, but it sure helps to know who your friends are. In this article, we’ll examine the value of ADX as a trend strength indicator. The average directional movement index was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument.

The direction is determined by the relative position of the +DI and -DI lines and their crossing. The trend’s strength means how much the buying volume exceeds the selling volume or how much the selling volume exceeds the buying volume. If they are equal, the price is flat, and the main oscillator single line is reaching 0.

A strong trend is present when ADX is above 20 and no trend is present when ADX is below 20. A long trade is taken when the +DI crosses above the -DI and an uptrend could be underway. Meanwhile, a sell signal occurs when the +DI instead crosses below the -DI. In such cases, a short trade may be initiated because a downtrend might be underway. The second part of the ADX indicator is the two DI lines which are usually color-coded .

Average True Range – the ATR Indicator: improve your trading with volatility measure

The sequence of ADX peaks is a visual indication of overall trend momentum, demonstrating when the trend is gaining or losing momentum – the acceleration of price. A succession of higher ADX peaks indicates trend momentum is rising. At the same time, a series of lower ADX peaks shows decreasing momentum.

According to Welles Wilder—he’s the analyst who developed this system—whenever the ADX is above 25, that means it’s a strong trend. So if you see that the +DMI is higher than the -DMI and the ADX is 35, then that means the price of that investment has a strong upward trend. The ADX just tells you how strongly that investment is moving in a particular direction—whether it’s up or down.

The https://traderoom.info/ is a component of the Directional Movement System developed by Welles Wilder. This system attempts to measure the strength of price movement in positive and negative direction using the DMI+ and DMI- indicators along with the ADX. When investing in the stock market, you need to identify a strong trend in a stock’s price movement. The ADX indicator or Average Directional Index is one such indicator that helps in identifying the strength of a market trend. Riding on this trend, you can make attractive returns.

The first ADX value is simply a 14-day average of DX. Subsequent ADX values are smoothed by multiplying the previous 14-day ADX value by 13, adding the most recent DX value and dividing this total by 14. Smoothed versions of +DM and -DM are divided by a smoothed version of the Average True Range to reflect the true magnitude of the move. Using these three indicators together, chartists can determine both the direction and strength of the trend. The Average Directional Index is in turn derived from the smoothed averages of the difference between +DI and -DI; it measures the strength of the trend over time.

• Due to current legal and regulatory requirements, United States citizens or residents are currently unable to open a trading office with us.
• One of the essential tools used for technical analysis in securities trading is the ADX.
• Unless otherwise indicated, all data is delayed by 15 minutes.
• The price chart shows a clear narrow flat of fewer than 10 points wide at 4-digit quotes.
• While observing the open trade, I simultaneously monitor the situation on an hourly interval.

Beginning in January though, ADX started to climb above 50, signaling that a strong trend could be waiting in the wings. It is based on comparing the highs and lows of bars and does not use the close of the bar. When trading, it can be helpful to gauge the strength of a trend, regardless of its direction. Determine significant support and resistance levels with the help of pivot points.

However, it’s important not to get confused with its direction. Remember that ADX value will be growing regardless of whether the market is experiencing a strong uptrend or a downtrend. When the value of the ADX is over 25 the market is trending. Investors are likely to implement trend-based strategies and open long or short trades depending on the direction of the trend.

From basic trading terms to trading jargon, you can find the explanation for a long list of trading terms here. The Structured Query Language comprises several different data types that allow it to store different types of information… ADX is simply the mean, or average, of the values of the DX over the specified Period.