Now measure the strength of a trend using ADX indicator. The ADX technical analysis indicator shows when a market is trending or not.
What Is The ADX (The Average Directional Movement Index)?
The Average Directional Movement Index is a technical indicator that shows whether or not the market is trending.
The ADX can produce possible buy and sell signals when paired with the DMI+ and DMI–.
The ADX Indicates the Strength of a Trend
The first thing to note is that the ADX’s movement is independent of the course of the underlying stock. The ADX just displays the strength of the trend.
Strong uptrend = Increasing ADX
Strong downtrend = Increasing
Trading with the ADX Crossover Strategy
Mr. Wilder, the ADX’s founder, created a common trading strategy focused on a crossover of the directional movement lines (+DI and -DI).
The first condition for a trade setup, according to the trading strategy, is that the ADX has a value of 25 or higher, indicating a trending market.
A buy signal is generated when +DI crosses above -DI, indicating that the underlying trend is up, while a sell signal is generated when -DI crosses above +DI, indicating that the underlying trend is down.
Stop-losses are set at the current trading day’s low, and the trade setup is still true if the directional movement lines cross again after the trade signal. The trade setup will become invalid only if the current trading day’s low was broken.
Traders may use a trailing stop on a trade if the ADX stays above 25 or rises even higher, meaning that the intensity of the underlying trend is increasing.
Before You Place a Trade
The ADX is a flexible technical indicator that can be used alone or in conjunction with other technical indicators.
The ADX crossover strategy is based on the crossing of the directional movement lines (+DI and -DI) as well as an ADX reading of 25 or higher. Although it can be applied to any timeline, it typically produces the best results when applied to longer time frames.
Trend-following traders can use the ADX to filter flat and ranging markets and avoid trading at those periods because it tests the strength of the underlying trend.