David Waring

In our last lesson we went over Bollinger Bands, an indicator which helps traders gauge the volatility in the market as well as how high or low current prices are relative to historical prices. In this lesson we are going to learn about the Average directional Index (ADX), an indicator which helps traders determine when the market is trending, how strong or weak a trend is, and when a trend may be about to start or reverse.

Example of the Average Directional Index (ADX)


I am not going to go into the formulas for the Indicator here however you do need to know that:

• The +DI Line is representative of how strong or weak the uptrend in the market is.
• The –DI line is representative of how strong or weak the downtrend in the market is.
• As the ADX line is comprised of both the +DI Line and the –DI Line, it does not indicate whether the trend is up or down, but simply the strength of the overall trend in the market.

If you would like a deeper explanation of the computation of the indicator you can find it here: ADX Indicator

As the ADX Line is Non Directional, it does not tell you whether the market is in an uptrend or a downtrend (you must look to price or the +DI/-DI Lines for this) but simply how strong or weak the trend in the financial instrument you are analyzing is. When the ADX line is above 40 and rising this is indicative of a strong trend, and when the ADX line is below 20 and falling this is indicative of a ranging market.

Example


So one of the first ways traders will use the ADX in their trading is as a confirmation of whether or not a financial instrument is trending, and to avoid choppy periods in the market where many find it harder to make money. In addition to a situation where the ADX line trending below 20, the developer of the indicator recommends not trading a trend based strategy when the ADX line is below both the +DI Line and the –DI Line.

Example


Another way that traders use this indicator is to identify the potential start of a new trend in the market. Very simply here they will look from below the 20 line to above the 20 line as a signal that the market may be beginning a new trend. The longer the market has been ranging, the greater the weight that most traders will give this signal

Example


Another way traders use the ADX is as a signal of trend reversals. When the ADX is trading above both the +DI line and the –DI line and then turns lower this is often a signal that the current trend in the market is reversing and traders will position themselves accordingly:

Example

The final example that I am going to cover on how traders use the ADX is to position to trade long when the +DI crosses above the –DI (as this is a sign that the buyers are winning out over the sellers) and to position to trade short when the +DI line crosses below the –DI (as this is a sign that the sellers are winning over the buyers). As with the other crossover strategies that we have covered used alone, the DI crossover is prone to many false signals.

Example

That completes our lesson for today. You should now have a good understanding of the ADX and several different ways that traders use this in their trading. In tomorrow’s lesson we are going to look at a new indicator which is called The Parabolic SAR, which many traders use to set stops when trading trends in the market.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!


Other Links to Help You Learn About Average Directional Index (ADX)

On InformedTrades

InformedTrades - Threads Tagged with adx

Elsewhere on the Web

Average Directional Index (ADX) - StockCharts.com
Technical Analysis for beginners: Average Directional Index (ADX):Meaning & Calculation
Interpreting ADX Average Directional Movement Technical Analysis Indicator
ADX Indicator on MarketVolume.com

Thank

 

dmichelle

Hello

On Market Browser they only give the ADX line and no Histograph for the MACD is this a common practice for technical indicators on common or easily found web sites?

Thank

 

David Waring

Hi Dmichelle,

Welcome to the community.

Technically the ADX is only one line however most of the time it is plotted along with the +DI Line and -DI line which it is composed of. Sometimes a charting package will have those two lines with the ADX listed as Directional Movement which should be the same thing that I have in the above video.

As for the MACD histogram some charting packages have this listed as a separate indicator which can be plotted along with the MACD or allow you to add it by going to the properties menu of the indicator.

These are two pretty basic studies that any charting package should have in my opinion so if this one doesn't you may want to check out the thread we have started on some of the other free charting packages out there.

Best Regards,
Dave

Thank

 

Unregistered

Hi David

The platform where I have a demo acct shows only one ADX line - no pos. no neg. How should I treat this then as those two lines seem good to have.

Thanks
Phyllis

rockk

Hi Guest,
to get free chart where you can find adx and D+,D- and other indicator , you can find that in metatrader4 chart (MT4 chart).
to get it free , many brokers in the net can give this; for example. you can get the platform of alpari , or interbank forex , there websites are :alpari.co.uk or ibfx.com.
to get their MT4 you have to register for demo account, then you can leave it if you dont want use , but you can go on using the MT4 charts.
you can also donwnload other more and more indicators for your MT4 from other site.
to help you download the mt4 and other added indicators easily, you can save your time surfing the net by watching the following video(please past or type the link below);
YouTube - where to get free metatrader 4 forex chart


I hope that will help you.
lastly ,why you dont register here ? I found that informed trader a nice website
thx.
rockk

Thank

 

P-P

hey david

thanks for the video,

So your saying the adx line is just a line that measures the amount of momemtum of a trend regarding which ever way the trend goes rather like other indicators like stochastics, which fluctuate to show overbought and over sold areas?

So the adx line can go past 20 or 30 (whatever it may be) in a strong down trend? If thats the case if it was in a strong down trend, the adx line will go up and the +di line will cross down the -di line (the red line will be above the blue line)?!?

Thanks,
Peter

Thank

 

David Waring

Hey Peter,

My pleasure glad to hear from you.

Yes at its most basic the ADX line measures how strongly or weakly a financial instrument is trending. This is different from oscillators however, as the ADX does not trend down with the market showing oversold conditions like an oscillator would. So the ADX line does not differentiate between uptrends or dowtends but simply the strength of the overall market.

To guage the buying and selling pressure in the market traders will often ad the +DI and -DI lines to the ADX line. The +DI line shows buying pressure and the -DI line shows selling pressure.

So with this in mind when the market is trending upward strongly you should normally see the +DI line trading above the -DI line and vice versa. With this the answer to your question is generally yes, in a downtrend you should see a rising ADX line (showing the the market is trending) and a rising -DI line that is above the +DI line (showing that the sellers are in control of the market).

Hope that helps. If there are any other questions or comments on this one please feel free to post them below.

Best Regards,
Dave

__________________
InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thank

 

P-P

hey david

thanks for replying..

the adx and the dmi seems like a very useful tool..

However on my fxcm demo account, the adx and the dmi are both seperate indicators, is there anyway that i can put those 2 together ?!?

Thanks,
Peter

Thank

 

David Waring

Hey Peter,

Glad you like it. Yes some charting packages have them as separate indicators and some have them together. I don't believe there is a way to combine them on the FXCM charts unfortunately.

Best Regards,
Dave

__________________
InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Thank

 

coronajazz

I have this idea about plotting ADX and Bollinger Bands into my trading toolbox. Please your opinion if I am thinking in right direction.

1.

I think bollinger bands acts like some kind of trend channels on the price action so if ADX is bellow 20, assuming that the market is in range then look for support or resistance at the price touching the lines for entry, and stop loss outside the bollinger band lines.

2.

If ADX shows a strong directional movement, above 30, then assume that market is in trend and look for entry at breakout of the bollinger bands, and stop loss just inside the band, or look for a correction of a trend or continuation pattern to enter in the direction of a trend.
Thanks!

Thank