The ADX(Average Directional movement index)

Discussion in 'Technical Analysis' started by sh50, Jan 30, 2005.

  1. sh50

    sh50 Active Member

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    This portion is from stockcharts:-

    J. Welles Wilder developed the Average Directional Index (ADX) in order to evaluate the strength of the current trend, be it up or down. It's important to detemine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.
    ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.
    ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing

    ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI).
    When the ADX Indicator is selected, SharpCharts plots the Positive Directional Indicator (+DI), Negative Directional Indicator (-DI) and Average Directional Index (ADX). With the Red, White and Green color scheme on SharpCharts, ADX is the thick black line with less fluctuation, +DI is green and -DI is red. +DI measures the force of the up moves and -DI measures the force of the down moves over a set period. The default setting is 14 periods, but users are encouraged to modify these settings according to their personal preferences.
    In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Be careful, though; when a security is in a trading range, this system may produce many whipsaws. As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.
    ADX combines +DI with -DI and then smooths the data with a moving average to provide a measurement of trend strength. Because it uses both +DI and -DI, ADX does not offer any indication of trend direction, just strength. Generally, readings above 40 indicate a strong trend and readings below 20 a weak trend. To catch a trend in its early stages, you might look for stocks with ADX that advances above 20. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range may develop.

    In my view, ADX is well explained in Alexander Elders book Trading for a living

    The latest book by Ashwini Gujral("How to make money trading derivatives) also has a comprehensive table on what all to do when ADX < 20, ADX 15-25,ADX > 30, ADX>=45 and ADX declining below 30. I have not seen Adx explained so specifically anywhere else.
    This is also interesting by some other author

    The Extreme Point Rule
    Identify a trigger point at the extreme price on the bar the lines cross. If it's a bullish crossing (+DI cross above -DI), you would wait for the price to rise above this extreme price (the high price on the day the lines crossed) on a subsequent bar. If it's a bearish crossing (+DI crosses below -DI), the extreme point is defined as the low price on the bar the lines cross. You would then wait for price to break below this extreme price on a subsequent bar before entering into a short position.

    Since trending and oscilatting is all what we track, I would request traderji or other senior member to cover indicators like Aroon, CMO, CCI etcetc. Some books give the impression that they are mere substitutes. If they are for specific situations, kindly let us know.
     
  2. jaideep

    jaideep Member

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    AWESOME !!!!! this post. You know; I like both facets, the poet & the T/A in you. Pretty rare combo I should say. Usually Traders & T/As are boringly serious guys. You are a refreshing deviant from the norm sh50. Pat yourself on the back. You deserve it. :)
     
    Last edited: Jan 30, 2005
  3. viveanan

    viveanan Member

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    As per ADX what is your view over current up trend, is it strong or weak ?
    Vivek
     
  4. sh50

    sh50 Active Member

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    The adx has slid and is horizontal for both nifty and sensex. On the nifty the value is 41 and sensex 37. Nifty closed on 27/1 at around 1955 and on 28/1 at 2008.30. The experts were of the view that above 1950-60, nifty would be bullish. In both the charts the macd also looks as if it is going to crossover. So the signs look good for onset of new rally. If one wants to be cautious one can wait till macd does the central line crossover. (I have mentioned MACD because when the market is trending one has to look at trending indicators)

    ADX around 45 is supposed to be mkt in a strong trend with consolidation expected anytime according to Mr Gujral. One should start booking profits if ADX tops or flattens out.

    Since you asked my views, I have given them but I am far from a pro. Maybe some real pro would like to comment.


    Jaideep,thanks for calling me a combo
    You make me feel so proud that I feel like a jumbo
    Unfortunately with TA, I always feel at limbo
    If not a dumbo
    Trading is like guerilla warfare, one has to be prepared like Rambo
    Ignorance can prove as menacing as Mr Indias Mugambo
    Half or incomplete knowledge can have a tsunami like effect near Colombo

    Poets can get very interesting people so all that you said goes for you too(more so because my poetry is like prose in poetry). I like reading management, spiritual and philosophical books. That makes me kind of boring but I try to spice it up with our "versy versatility."
     
    Last edited: Jan 31, 2005
  5. amarnath

    amarnath Guest



    Multi collinearity indicators doesnt improve one's trading strategy /system
    And funcky indicators doesn't mean they are more prefect to trader tool . Simply there is no holy grail
     
  6. sh50

    sh50 Active Member

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    I did not post this to discover a holy grail. In one ot the articles on www.stockcharts.com, it is given that one should ideally have an oscillator(RSI, stochastics, CCI), a trend indicator(MACD, Moving average,ADx), a relative strength comparative and a volume based indicator.

    I was just wandering whether CCI and CMO are mere substitutes since they are not generally mentioned in TA books.
     
    alroyraj likes this.

  7. amarnath

    amarnath Guest

    Hi Sh50,

    Don't get me wrong at this point . Actually i refered to Multi collinearity Indicators like using Stoc , Rsi , stocrsi , cci doesnt help to make a trading strategy better .

    I mean using two OB/OS ind does not improve a system /strategy like rsi and stoc or cci . ;)

    Ok we will discuss this issue later as market now waiting for a big event < Non farm pay roll and Alan green span speech :confused: >
     
  8. wcnw

    wcnw Member

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  9. ash.investor

    ash.investor Member

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    IMHO, ADX is a lagging indicator and indicates the trend quite late.
    Consider the below Buy and Sell Signals-
    (a) Buy Signal: +DI/-DI crossover +DI moving upward and rising ADX > 20
    (b) Sell Signal: +DI/-DI crossover -DI moving upward.

    But most of the time I find that when + DI crosses -DI and but ADX is either declining or ADX is below 20. This makes it difficult to develop a Mechanical Trading System based on ADX.

    I have trading system consisting of Movinf Average Crossover, MACD and CMO but I am in search of an trend indicator that gives early indication in sync with my other indicators.

    Expert Traders please advise.

    Regards,
    a$h.investor
     
  10. kkseal

    kkseal Well-Known Member

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    Yes it's too damn lagging.

    A better way to use it would be to use a pair - one for the short term & another one for the longer term, like say a 10d & a 30d ADX. So if the short term ADX is below 30 while the longer term is above it (with off course +DI above -DI), what we get is a short term pullback in a longer term uptrend that is still intact and may actually be a buying opportunity. Another way would be to have one on the weekly & another one on the daily and enter on pullbacks on the daily while the weekly trend is still intact.

    Alexander Elder has also devised an interesting indicator called the FORCE INDEX. This one factors in both price & vol movements & can be pretty useful particularly for short term trading; but many TA s/w's do not have this indicator.

    Regards,
    Kalyan.
     

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