What is ADX?
The Average Directional Index (ADX) is a technical indicator that measures the strength of a trend. It was developed by Welles Wilder and first published in his book New Concepts in Technical Trading Systems in 1978. The ADX is calculated by taking the average of the absolute values of the directional movement indicators (DMIs). The DMIs measure the strength of the trend in both the positive and negative directions.
How does ADX work?
The ADX is calculated using the following steps:
Calculate the DMIs. The DMIs are calculated by taking the difference between the high and low prices of a security over a specified period. The DMI in the positive direction measures the strength of the uptrend, while the DMI in the negative direction measures the strength of the downtrend.
Calculate the ADX. The ADX is calculated by taking the average of the absolute values of the DMIs. The ADX is a single number that ranges from 0 to 100. A reading of 0 indicates no trend, while a reading of 100 indicates a strong trend.
How to use ADX
The ADX can be used to identify the strength of a trend and to determine whether a trend is likely to continue. The ADX can also be used to identify potential reversals in the trend.
To identify the strength of a trend, look at the ADX reading. A reading of 25 or above indicates a strong trend, while a reading of 10 or below indicates a weak trend.
To determine whether a trend is likely to continue, look at the direction of the ADX line. If the ADX line is rising, the trend is likely to continue. If the ADX line is falling, the trend is likely to reverse.
To identify potential reversals in the trend, look for divergences between the ADX and the price. A divergence occurs when the ADX line is making a higher high or lower low, while the price is making a lower high or higher low. A divergence is a sign that the trend may be weakening and that a reversal may be coming.
Advantages of using ADX
The ADX is a versatile indicator that can be used to identify trends in a variety of markets. The ADX is also relatively easy to understand and use.
Disadvantages of using ADX
The ADX can be slow to react to changes in the trend. The ADX can also be noisy, meaning that it can generate a lot of false signals.
Conclusion
The ADX is a valuable tool for traders who want to identify trends and reversals in the market. The ADX is easy to understand and use, and it can be used to trade a variety of markets. However, traders should be aware of the limitations of the ADX and use it in conjunction with other technical indicators.
