30. July 2014 22:57
ADX is a directional movement indicator developed by Wilder in 1978. Although it is a directional movement indicator, ADX is non-directional; meaning it will measure the strength of a trend regardless of whether the trend is up or down. In other words, ADX doesn’t express the direction of the trend; it only denotes the trend strength. A trend can either be uptrend or a downtrend, it just tells you how strong the current trend is!
ADX can be a very good indicator to choose between a trending stock and a non-trending stock. Even better, it can be great indicator to spot beginning of a trend. ADX, like RSI, also ranges between 0 to 100. ADX below 30 denotes that the stock is not in any trend and is most likely in trading range, most likely just chopping around sideways. ADX once above 30 generally means that the stock is in beginning of a trend. And once it crosses 35-40, it is said to be in a strong trend. ADX above 60 generally indicates the exhaustion of the trend and likelihood of trend fizzling out soon.
ADX lags a bit as a indicator, i.e., a trend must be in place before the ADX will denote that the trend is underway. ADX is most widely used a filter to scan stocks that are at the start of a trend. Used along with RSI, ADX can give great trading opportunities for trend following traders.
Study of ADX to evaluate and spot trends can help traders to choose the strongest trends and let profits run when the trend is strong.