Timing Solutions for Swing Traders: A Novel Approach to Successful Trading Using Technical Analysis and Financial Astrology

AVERAGE DIRECTION INDEX

Average Direction Index (ADX) is a valuable indicator that is widely used by analysts to identify whether a trend exists, and to quantify trend strength. ADX was developed by J. Welles Wilder Jr., and published in his 1978 book, New Concepts in Technical Trading Systems. We shall not get down to the nitty-gritty calculations of ADX; it is available in all technical analysis software programs.

ADX was developed as part of a direction movement indicator, which is generally plotted together as two related directional movement lines, the positive directional movement line and the negative directional movement line.

ADX is an oscillator that fluctuates between 0 and 100. ADX’s value, with a standard 14-day setting, seldom exceeds 60 or falls below 10. ADX is plotted as a single line and is not a directional indicator. As a rule of thumb, when ADX crosses above 20 from below, it suggests that the price trend is getting stronger. On the other hand, when ADX crosses from above to below 20, price trend strength is getting weaker and is entering into a non-trending market. Thus, a high ADX value can indicate a strong downtrend as well as a strong uptrend.

Higher ADX value represents a stronger price trend, while lower ADX value represents a weaker price trend. Thus, a rising value of ADX reflects a strong trend is in progress, a declining ADX value reflects a weakening trend, and a flat ADX reflects an absence of trend. As a result of its behavioral patterns in revealing ...