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The ADX Indicator – Average Directional Index
The ADX is measured is measured on a scale of 1 – 100. The standard unit of measurement is 14 days. High ADX readings reflect a strongly trending stock. In general, 14-day ADX readings above 30 suggest a strongly trending stock. Low ADX numbers reflect non-trending markets, generally less than 20. Interestingly, when ADX drops below 18, it often leads to a sideways or rectangle type trading pattern , and the moving averages start to cluster around the price of the stock. The ADX Indicator does NOT act well as a trigger. Prices will always move faster than the Average Directional Index, as there is too much of a smoothing factor, which causes it to lag the stock price movement.
ADX Uses _______________________________________________________________
Breakout
When your stock you are analyzing is in a sideways basing rectangle, the ADX is most effective when it begins to rise from a low level, 18 or less. When there is a price breakout, and the ADX was at 18 or below, confirm the breakout by seeing if today’s ADX level, is above yesterdays ADX level. Also confirm with On Balance Volume.
When Day Trading, an ADX above 40 indicates a strong trend or breakout is in progress, and price is likely to continue in the direction of the current trend. Because the ADX measures trend strength rather than direction, the ADX line will move up sharply during sell-offs as well as up moves. This is the single most valuable use of the ADX indicator: as a leading indicator on hourly charts to help spot potential breakout continuations after an ADX reading above 40 occurs.
Over-Extended high stock price
When a share price has gone to extreme highs very quickly, and the ADX is rising and above 50 and turns down, this is a signal that a possible price reversal is at hand. So a stock trader can look to get ready to sell, and get set-up to sell short. See the chart below. Swing Trade
See the chart below. In a down-trend swing trade, if the ADX is above 30, when the ADX forms a top and begins to turn down, you should look for a share price retracement up to the 20 day exponential moving average (EMA). _______________________________________________________________ Recommended Technical Analysis Tools and Resources Recommended Technical Stock Trading Software _______________________________________________________________
Tell Us About Your Favorite ADX Indicator Use and StrategyIs there a specific ADX Indicator Strategy or Technique that you use, that is not described on this page?
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