Monthly Archives: May 2017

Tutorial on Average Directional Index (ADX)

Most profitable and least risky strategy is to trade with the trends. The stronger the trend the better the reward is. Finding the trend, measuring its strength is possible with Average Directional Index (ADX), an indicator developed by Welles Wilder. It may be worth mentioning here that of Welder contribution to technical analysis was also in developing RSI, ATR and Parabolic SAR.

ADX indicator is used to find whether Stock is in trend and also finds the strength of the trend. It, however, does not indicate about the direction of the trend. It provides similar value for both uptrending and down-trending stocks. Stock direction is provided by additional lines that supplement with ADX. We will cover them later.

Though complex in calculating its value, its usage is very simple. Its value oscillates between 0 and 100. Wilder suggested that if ADX is above 25 then stock is trending and as the trend gets stronger, ADX moves up. A value above 40 is considered a very Strong uptrend. A value below 20 is considered as no trend or side ways market.O wing to its vast acceptance, most of technical Analysis software does the calculation including TopStockResearch.

 

Trading Strategies with ADX and Interpretation

ADX Value Trend Strength Comments Stock Screener at TSR
0-20 Non Trending Sideways market or a phase of Accumulation/Distribution Yes
20-25 Trending for less Volatile Stocks Some Analyst use value above 20 as Trending. Works for lesser volatile stocks Yes
25-40 Strong Trend This indicates very strong trend. Traders should take advantage of it. Yes
40-60 Very Strong Trend Rare but they do occur Yes
60-100 Extremely Strong Trend Very rare. Such trends are not sustainable and traders should be ready for trend reversal Yes

Read the rest of this entry

Advertisements