The ADX value can range between 0 to 100, and a higher ADX value indicates a stronger trend. The Average Directional Index (ADX) is a technical indicator used by traders and investors to determine the strength of a trend in the price of a financial asset. Welles Wilder Jr. in 1978, the ADX is considered one of the most reliable trend indicators.
Quick Clip: This Stock Chart Indicator Helps You Avoid False Sell Signals
More reliable reversal signals come from ADX divergences with price or when ADX starts declining from high levels combined with directional indicator crossovers. Generally, ADX values above 25 indicate trending markets suitable for trend-following strategies. Values above 50 suggest very strong trends, while values below 25 indicate choppy, sideways markets better suited for range-trading strategies. Although it was developed for commodities, it can be used for stocks also. Since Commodities are more volatile, ADX would yield better results with more volatile stocks.
The #1 Best Price Action Strategy for Trading Gold The Gold Nugget Zone.
Liberated Stock Trader, founded in 2009, is committed to providing unbiased investing education through high-quality courses and books. We perform original research and testing on charts, indicators, patterns, strategies, and tools. Our strategic partnerships with trusted companies support our mission to empower self-directed investors while sustaining our business operations. We tested 42,600 trades and the best ADX settings are using ADX(14) and a crossover value of 20. This generated improved trading reliability and a 10-year market outperformance of 28%
data-load-additional-stories=”true”>
If the ADX line is falling, it indicates that the trend is losing strength. This means that the ADX line will generally lag behind the actual price movements of the underlying asset. As such, the ADX is typically used in conjunction with other technical indicators to provide a more complete picture of market conditions.
- To improve accuracy, the ADX is best used in conjunction with other indicators such as moving averages, RSI, or support and resistance levels.
- To measure direction you need to combine the ADX with the Plus DMI and Minus DMI or other trend indicators to find the direction.
- Test these ideas for yourself in combination with a complete trading system and see if you can find an ADX trading strategy that improves your system!
Cross-check: ADX is still strengthening → not a high-quality RSI sell signal.
Finally, the ADX says nothing about the actual price of a security, just the strength of a trend. So it’s wise to use the ADX along with other technical indicators to determine entry and exit points. The common mistakes might be such as avoiding trading when ADX is below 25, mistaking a falling ADX for a reversal, or ignoring the slope changes. The traders must always pair the ADX with directional indicators to prevent any false signals. Next, the traders observe the ADX line to know when it moves above 25, which signals that a strong trend is forming. If the ADX rises, it means the strength is building, while if it falls, it means the trend is losing steam.
This can mean entering trades earlier, but can also result in more false signals. It’s up to each individual trader to determine what best suits them. The best trading decisions are based on objective signals, not emotion. When price makes a higher high and ADX makes a lower high, there is negative divergence, or non-confirmation.
ADX price divergence strategy
While the default 14-period setting works well on intraday charts like 5-minute or 15-minute timeframes, shorter periods such as 7 or 9 are better for capturing rapid trends. The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with a smoothed moving average.
The top half shows that stocks had been in a long-term uptrend until late-February, but have since trended lower. This is a balanced setting that provides a good blend of responsiveness and smoothing. It’s generally suitable for swing trading and longer-term analysis. The ADX behaves differently in different phases of the market and is crucial for adapting trading strategies accordingly. Let’s assume you’re trading Nvidia’s stock, which has been on an uptrend for several months on news of companies spending heavily on AI.
From a technical analysis perspective, a rising stock in a strong uptrend may suggest greater likelihood of continuing to rise than the same stock whose uptrend is showing signs of weakening. Conversely, a falling stock in a strong downtrend may suggest greater likelihood of continuing to fall than the same stock whose downtrend is showing signs of weakening. The ADX’s https://traderoom.info/adx-trend-indicator/ ability to measure trend strength indirectly helps you adapt to changing market volatility. This confluence of signals provides a much stronger trading opportunity.
In this case, the Average True Range (ATR) is the moving average of the True Range values over the same 14-period window. If both +DM and -DM are positive for the same period, only the larger value is used, while the indicator with the smaller value is set to 0. When price reversed, the -DMI crossed above the +DMI, and ADX fell as the uptrend died, then eventually rose again as the downtrend gained momentum. Forex trading involves significant risk of loss and is not suitable for all investors. The next time you think a trend is changing and you need to decide whether to stick to this “friend” or cut ties, consider trying the ADX to confirm the trend’s strength. For instance, when ADX starts to slide below 50, it indicates that the current trend is losing steam.
- Like all indicators and trading rules, it should be backtested before using to ensure profitability on your chosen markets and timeframes.
- This combination leverages the directional bias of moving averages with the trend-strength confirmation of the ADX.
- Both are valuable but serve different roles in your trading toolkit.
This updated plus DMI value is then divided by the sum of the current high price minus the previous low price and the previous high price minus the current low price. ADX is painting a mostly bearish picture, with the latest data giving investors something to keep an eye on. ADX readings over the near term could provide insight into the strength of the latest market trends. To understand why, consider a hypothetical stock that is rising in price. Would you rather own this stock if the uptrend were strengthening or weakening?
Traders can adjust the period used for the calculations to fine-tune the indicator’s sensitivity to market movements. The ADX evaluates the strength of a trend, whether upward or downward. It does not show the trend’s direction, but it does help traders determine if the market is trending strongly or meandering sideways. ADX line measures trend strength while the other two help in showing trend direction.
All these help in just knowing the strength of the trend, with the traders can check whether the current price momentum is going to survive or not. This ratio will help you understand how strongly one directional graph dominates over the other. For example, if +DI is above -DI and ADX is rising, it signals that the price is in a strong uptrend. The +DI lines show the strength of upward price movements that are happening in the stock. When this line is higher than -DI, it means that stock is having good demand and uptrend is there.