Key features of ADX
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Average Directional Index is developed by Welles wilder is an indicator in technical analysis describing the strength of market trends regardless of whether it is up or down.
The directional movement of positive and negative forms the backbone of the Directional movement system. Wilder determined movement by comparing the difference between two consecutive lows with the difference between their respective highs.
ADX is determined whether stock, future, currency pair is trending or is in trading range.
EVALUATING TREND STRENGTH
ADX helps traders determine the strength of a trend in fact values are necessary to differentiate the trend not the actual direction.
1) Strong upward trend of stock= Increasing ADX
2) Strong downward trend of stock =Increasing ADX
ADX is 0-20 = No trend
ADX is 25 = strong trend
ADX is above 50 = extremely strong trend
ADX is above 70 = power trend.
Oscillator ranges between 0 and 100 with high readings indicating a strong trend and low readings indicates weak trend.
+DI line is greater than the –DI line = Bulls have the directional edge.
-DI line is above the +DI line = Bears have the directional edge.
Strategically sell when –DI is up and major trend is down.
Buy when +DI is higher than –DI, but only larger trend is also moving up.
COMPONENTS OF ADX
DI- = Negative movement
DI+ = Positive movement
ADX = Moving average of ADX
DX = Positive and Negative movement.
The Directional movement system indicator calculations are complex, interpretation is straight forward and successful implementation takes practice. +DI and –DI crossover are quite frequent and traders used to filter signals with complimentary analysis.
These crossover signals will be similar to those generated using momentum oscillators. Traders need to look elsewhere for confirmation. Traders can focus on +DI buy signals when the bigger trend is up and –DI sell signals when the bigger trend is down.
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