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Average Directional Index (ADX) PDF Print E-mail RSS
Sunday, 12 August 2007

This is the first of a set of indicators that the Turtles used to determine if they should enter a trade. To determine the strength of a trend, the ADX tends to be a good technical indicator. It does not determine the future trend direction, rather, it is used to determine only the strength of a trend. It is measured on a scale between zero and 100.

For a trend weakness, look for a reading below 20, or a trend that is increasing above 20.
For a strong trend, look for a reading above 40 or a trend that is falling below 40.

Even though the ADX is used to determine the strength of a trend, it can identify possible trend changes. Traders like to see ADX readings rising above 20 or falling below 40 as potential trend changes in the market.

The longer the period specified for the ADX, the smoother the line will be, but there will also be more lag between the absolute trend and the ADX.

technical analysis study

Notice the lack of a trend from early 05 till even 07. Buffalo Wild Wing was undergoing trading rather than trending - that is why it appears to be volatile, and that is why the ADX is below 20 for the most part signifying a weak trend.

technical analysis study

Here we have Google. Indeed, a very strong trend. We can identify support because of the trend. Likewise, because there is a trend, we can witness the high ADX, signifying a strong trend.

 
 
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