What is the ADX indicator?
The ADX technical indicator It is based on the directional movement index, a concept that was developed by Welles Wilder. It is a widely used system in trading based on the analysis of the market trend. The Directional Movement Index determines the direction of the market and/or stock price, relative to the previous day, based on complex calculations.
This technical indicator is represented on a scale from 0 to 100 and has a horizontal line above the 30 level. For its correct calculation, the values must have as data the maximum, the minimum and the closing of each period, whether daily, weekly or monthly.
technical indicator ADX It allows establishing a strategy in trading of purchases and sales of securities, but its use is very selective. The ADX indicator plots a series of peaks and troughs that occur at the same time as they occur on the price chart. If the trend of the price chart is bullish, the peaks will represent turns in the trend and, therefore, sales, and the troughs points to purchases. If the trend of the price chart is bearish, the interpretation is the opposite. This is one of the uses of this technical indicator that is widely used in trading by traders of all kinds.
Although the above strategy is a possible use of the ADX technical indicator, its most important role in trading is to determine whether a stock is trending and how strong the trend is. The indicator does not provide information about the direction of the trend, only about its strength.
How is ADX calculated?
For the calculation of the ADX technical indicator, you must enter the period of days or weeks. The shorter this period, the more sensitive the ADX is for the buy and sell strategy. The period used by default is usually 14 days.
The analysis in trading of whether or not a value is in a trend, whether it is bullish or bearish, is given by the value that the ADX indicator. If it is greater than 30, that is, if it is above the horizontal line of the chart, the value is in trend. This facilitates the analysis of the type of indicators that are more correct to study the value at that moment or to give more or less importance to the values of the indicators, without ever losing sight of the price chart.
Thus, if a value is in a trend, it will be better to use indicators such as the MACD, or the moving averages with a longer term to carry out a more accurate analysis. If it is not in a trend, or it is weak, it is more appropriate to work and carry out an analysis with oscillators such as the RSI, stochastic or momentum, widely used when trading.
It should be stressed that this ADX indicator does not provide information about the direction, movement or strength of the trend, so you always have to keep in mind the price chart or other indicators to see the direction (bullish or bearish) and be able to make any decision. in your trading.
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