ADX (Average Directional Index)
When trading, it can be helpful to gauge the strength of a trend, regardless of its direction.
And when it comes to evaluating the strength of a trend, the Average Directional Index is a popular technical indicator for this purpose. The Average Directional Index, or ADX for short, is another example of an oscillator. ADX fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend. The ADX calculation can be complicated, but in a nutshell, the stronger the trend, the higher ADX goes When the ADX is low, it highlights periods when the price is usually going sideways or trading in a range.
When the ADX has risen above 50, this indicates that the price has picked up momentum in one direction. Unlike Stochastic, ADX does NOT determine whether the trend is bullish or bearish. Rather, it merely measures the strength of the current trend. Because of that, ADX is typically used to identify whether the market is ranging or starting a new trend. ADX is considered a “non-directional” indicator. It is based on comparing the highs and lows of bars and does not use the close of the bar. The stronger the trend, the larger the reading regardless of whether it is an uptrend or downtrend.
When you’re using the ADX indicator, keep an eye on the 20 and 40 as key levels. Here’s a little cheat sheet to help you interpret ADX values. If there’s one problem with using ADX, it’s that it doesn’t exactly tell you whether it’s a buy or a sell. What it does tell you is whether it’d be okay to jump into an ongoing trend or not. Once ADX starts dropping below 50 again, it could mean that the uptrend or downtrend is starting to weaken and that it might be a good time to lock in profits. DX can be used as confirmation of whether the pair could possibly continue in its current trend or not. Another way is to combine ADX with another indicator, particularly one that identifies whether the pair is headed downward or upwards. ADX can also be used to determine when one should close a trade early.