The ADX, acronym of the English term “Average Directional Index” is a trend indicator that measures the strength and intensity of a price movement in the stock markets. The ADX was developed as an indicator of the strength of the commodity trend or commodities The setting can be placed between 7 and 30 settings with fewer periods, will cause the average directional index to respond more quickly to the movement of the prices but these tend to generate false signals and therefore to make the reading of the diagram counterproductive. Settings with higher periods minimize false signals but make the ADX a strongly delayed indicator in generating entry points. The ADX is a combination of several indicators: the Plus Directional Index (+DI) and the Minus Directional Index (-DI) and finally the ATR.
Graphically it is composed on three lines:
ADX is a line that indicates the strength of the trend without specifying the direction.
+DI line derived from the measurement of the bullish push.
-OF line derived from the indicator of the downturn in the market.
The +DI line represents in the diagram the strength of a possible bullish trend, while the -DI line represents the force of the opposite trend, that is, bearish. The values that the ADX can assume start from the value 0, that is total absence of trend, in order to arrive to a maximum directional push to the value 100. Values over 60 are very rare cases and should be carefully evaluated: these can be unrepeatable trading opportunities or, more commonly, errors in setting the indicator. Values between 0-25 indicate a lateral phase of the analyzed financial market from which more experienced investors usually keep away. If the line of the indicator crosses the Zero Line (which in this case is fixed at 25), it is a clear sign that the trend is taking a very precise direction. More precisely, values between 25 and 40 are the best time to search for the entry points of a new trend. Values above 40 indicate the presence of a very strong trend in progress that leaves no room for any trend reversals. These two algorithms, combined with the Average Directional Index, are used to generate buy and sell signals based on crossovers between lines. When the indicator +DI is above the indicator -DI, it is clear that Long traders, the “bulls”, have the price trend in their favor. Conversely, when -DI is higher than +DI, the advantage is in the hands of traders with positions in Short, ie the “bears”. It is important to understand that the ADX indicator shows the trend and its strength, not the direction that the chart will take. Instead, the direction of the trend is determined by observing the two other indicators, which as can be deduced from their name +DI and -DI.
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