Volume Indicator: Average Directional Index (ADX)
The Average Directional Index measures if a stock is trending or not. It also measures the strength of the trend no matter it’s direction, and it is made up of other two parts, the +DI (Plus Directional Index) and the –DI (Plus Directional Index), which can generate a buy or sell signal.
The ADX, often combined with other indicators, Mainly tells you if what you are trading is ranging or trending. This will help you decide if using a ranging or trending strategy.
Well Wilder stated that the ADX above 25 shows a trending market and below 20 it is a ranging market. But often the 20 value is the dividing point between trending and not trending. As you can see above in the Dax Rolling bet, it was trading in a 400 point range for four months up until August. At the beginning of August, the DAX broke out of a range and traded lower almost 2000 points. At this point the ADX started moving above the 20 line.
Interpreting the ADX:
-The ADX above 20: the trend is starting.
-The ADX moving higher from 20 to 40: a trend is under way.
-The ADX above 40: the trend is very strong.
-The ADX moving lower from 40 to 20: a trend is under way.
-The ADX below 20 the markets are ranging.
Lagging Indicator: As you see above the ADX showed the start of the trend a bit. It is a lagging indicator. In fact often The Average Directional Index is complementary to another indicator.
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