ADX – A technique to trade the markets.

ADX – A technique to trade the markets.

ADX is an indicator, more popularly a trading system that measures trend strength shows trend direction.

ADX tells us whether the bulls or the bears are in control.

Tells when the trend is strong enough to trade and  when the trend is weak (stand aside).

Myth: To make money in the stock market, you must know what the market is going to do.

Truth: You must know what you’re going to do before the market does what it does.

ADX is derived from two indicators (developed by Wilder) known as the :

Positive Directional Movement Indicator (+DMI)

Negative Directional Movement Indicator (-DMI)

The formulae behind ADX is very simplified as :

DM is the largest part of today’s range that is outside of yesterday’s range.

When the largest part of today’s range is above yesterday’s range, we get positive DM (+DM).

When the largest part of today’s range is below yesterday’s range, we get negative DM (-DM).

Trend strength through ADX

When ADX > 25

􀂄 If +DMI is above –DMI, prices are trending up.

􀂄 If –DMI is above +DMI, prices are trending down.

Three cases to trade through ADX

Short Mode

􀂄 ADX > 25

􀂄 -DMI above +DMI

 Scalp Mode

􀂄 ADX < 25

Long Mode

􀂄 ADX > 25

􀂄 +DMI above -DMI