Technical Indicator MEGA Reference Part 05b – Average Directional Index (ADX)

Read Part 5a Here First Before Proceeding

It is important to re-emphasize that the direction of price doesn’t affect the ADX; it is the strength of the stock, futures, or currency’s trend that matters.

Below, we see the E-mini Russell 2000 Futures contract, but here the e-mini future is in a downtrend, a strong downtrend. Note that the ADX is rising even though the price of the e-mini future is falling.

Interpreting the ADX

  • Below 20: Non-trending market.
  • Crosses above 20: Signal that a trend might be emerging; traders might consider initiating buy or sell orders in the direction of the prevailing stock, future, or currency price movement.
  • Between 20 & 40: If ADX is increasing between 20 and 40, then it is considered further confirmation of an emerging trend. Traders might consider buying or shortselling in the direction of the current market direction. Furthermore, traders might avoid using oscillator technical indicators and instead consider using trend following indicators like moving averages.
  • Above 40: Very strong trend.
  • Crosses above 50: Extremely strong trend.
  • Crosses above 70: “Power Trend"; very rare occurence

In his book, New Concepts in Technical Trading Concepts, Welles Wilder, Jr., the creator of the ADX also created the DMI+ and DMI- indicators to generate potential buy and sell signals specifically for the ADX technical analysis indicator. In fact the ADX is derived from the DMI+ and DMI- calculations.

The most recent information on the ADX indicator is chronicled in the book ADXcellence by Dr. Charles B. Schaap.

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