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ADXIndicatorExplainedforTrendTrading|tradimo

ADX:determiningthestrengthofpricemovement
Beforereadingthislesson,youshouldhavepreviouslyreadthrough:
Indicators:anintroduction
TheADX(average
directionalindex)is
anindicatorthatshows
youhowstrong
atrendis.

TheADXgivesyoua
readingthatgenerally
rangesbetween0and
50.Thehigherthe
reading,thestronger
thetrend.Thelower
TheADXindicatormeasureshowstrongatrendis.Itdoesnot
providebuyorsellsignals,soitisbestusedwithother
indicators.
thereading,theweakerthetrend.
TheADXisveryusefulasaconfirmationtoolwhenyouwanttotradeinatrendingmarket,
butitwillnotgiveyoureliablebuyorsellsignalsonitsown.

UsingADXtomeasurethestrengthofatrend
TheADXconsistsofthreelines,whichallmeasurepriceactioninslightlydifferentways:
TheADXline
TheDI+line
TheDIline
Thechartbelowshowswhattheindicatorlookslike:
DI+line
DIline
MainADXline
Thestraightredlinepassinghorizontallythroughthemiddleoftheindicatorboxmarksthe
25level.
IftheblueADXlinemovesbelowthis25levelitindicatesarangingmarketoratrendthatis
tooweaktotrade.Ifitmovesabovethe25levelitindicatesastrongtrendhasnowbeen
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established.
Areadingof
between30
and50signals
astrongtrend.
IftheADXline
reachesas
highas50,
however,the
trendis
consideredat
itspeakand
nonewtrades
shouldbe
attempted,as

Areadingbetween30and50signalsanextremelystrongtrend
thathasahighprobabilityofgeneratingaprofit.Areadingover
50meansthetrendisatitspeakandnonewtradesshouldbe
attempted.
themarketveryoftenreversesfromthatpoint.

TheDI+andDIconfirmwhetheratrendisupordown
ThemainADXlinedisplaysthesmoothedaverageofmovementsintheprice.Asalready
explained,areadinghigherthan25showsyouthatatrendhasbeenestablished.
TheDI+andDIlinesmeanwhileinteractwitheachothertoconfirmwhetherthattrendis
upordown.
WhentheDI+linerisesabovetheDIline,thetrenddirectionissaidtobeup.Whenthe
DI+linefallsbelowtheDIline,thetrenddirectionissaidtobedown.
Takealookatthechartbelow:
DI+linecrossesaboveDIline,indicatinganytrendisup
ADXisabove25,confirmingtrend
Priceisinanuptrend
Asyoucansee,thedottedgreenDI+linemovesabovetheDIline,shownat ,signalling
thetrenddirectionisup.TheblueADXline isabovethe25level,meaningthattheprice
isnowtrending.
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Exercise1:WheredoestheADXconfirmastronguptrend?

Showexercise

ChangingtheADXperiods
TheADXcalculatesitsreadingfromacertainnumberoftradingperiods(orcandles)onthe
chart.Thestandardsettingis14periods,butthiscanbemodifiedtosuityourowntrading
style.
ThestandardsettingfortheADXis14periodsandcanbe
modifiedtosuityourtradingstyle.
Asaguide,tradersgenerallysticktotherangeof7periodsto30periodswhenadjusting
thesettings.
ThechartbelowshowshowdifferentperiodsettingsaffecttheADXreadings:
Inthechartabove,theADXissetto28,showninthetopleftcorneroftheindicatorbox.
Usingarelativelyhighsettingilkethissmoothsouttheaveragepriceactionshownbythe
ADXlineoveralongertimeframe.
Thisresultsinmorereliabletrendreadings.However,italsomeansthatrecognisingthem
takeslonger.Youcanthereforemissabigportionofanypricetrendbythetimethe
indicatoralertsyoutoit.
Usinglowersettingswillresultinmoretrendsbeingdetectedearlier,butsomeofthose
"trends"canbefalse.
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Inthechart
below,the
indicatorisset
to7,making
themainADX
lineappear
choppier:

Settingsdo
notchange
DI+and
DI
readings
Takenotethat
changingthe
ADXsettings
Whilealowerperiodsettingresultsinmoretrendsbeing
detectedearlier,itraisesthelikelihoodoffalsesignals.
willusually
haveonlya
negligible
effectonthe
DI+andDI
lines.
Onbothofthe
chartsabove,
forexample,
youcansee
thatthered
DIlinemoves
abovetheDI+
line.They
therefore
indicatea
downward
trendregardlessofwhethertheindicatorissettoperiodsof28or7.
IfyoudochangethesettingsfortheADXindicator,alwayscheckwhetheryourchangesare
improvingorworseningyourtradingresults.Youwilllearnwhichsettingssuityoubest
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throughtrialanderror.

Summary
Inthislesson,youhavelearned...
...theADXisprimarilyatrendstrengthindicator.
...itisausefulconfirmationtoolbutitdoesnotprovidebuyorsellsignals.
...itconsistsofthreelinestheDI+,DIandADXlineswhichmeasurepriceactionin
aslightlydifferentway.
...itprovidesareadingthatgenerallyrangesbetween0and50.
...areadingbelow25indicatesaweaktrend.
...areadingofabove25signalsastrongtrend.
...areadingofbetween30and50signalsanextremelystrongtrend.
...areadingofover50signalsthatatrendisatitspeakandcouldsoonreverse.
...thestandardsettingfortheADXis14periodsandtradersusuallyoptforasettingof
between7and30periods.
...ahighersettingwillsmoothpriceactionandprovidemorereliablesignalsbutmight
alertyoutotrendstooslowly.
...alowersettingwillresultinmoretrendsbeingdetectedearlierbutcanalsoprovide
falsesignals.

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