What is Average Directional Index (ADX)?

Average Directional Index (ADX) is used to quantify trend strength. Three lines including Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) are formed to determine both trend direction and trend strength. 

Source: MQ Trader Stock Analysis System

You may refer to ADX Calculation for more information.

How to quantify Trend Strength?

The value of ADX is very important for distinguishing between trending and non-trending conditions.

Table 1: The trend strength of ADX values

Note: Low ADX value gives a sign of accumulation or distribution while high ADX value indicates an uptrend condition.

How to determine entry signal from ADX Crossover?

Green arrow will appear when there is a buy signal identified by our MQ Trader Stock Analysis System.

How to determine exit signal from ADX Crossover?

ADX Crossover on Supermax

Figure 1: ADX Crossover Daily Chart where 1 candle represents price movement within a day.

RM2.20 per share of profit can be earned between 9^th January 2018 till 25th July 2018 according to the buy signal in the system. There is no sell signal observed since 9th January 2018 showing that this stock has been experiencing long term uptrend price movement and this condition will keep going at the moment.

For traders who want to earn the profits within shorter time, shorter time basis of the charts (I.e. 30 minutes, Hourly) can be used, as there will be more candles within a day which can trigger more trading signals.To validate the possibility of the breakout, shorter duration of charts can be used to confirm the strength of the buy signal.

How to confirm trading signals?

Figure 2: ADX Crossover on 20 July 2018: (1) Daily Chart (2) Hourly Chart (3) 30 Minutes Chart (4) 10 Minutes Chart.

One of the features of MQ Trader system enables us to view multiple technical charts (2 - 6 charts) on a single page in MQ Trader system. This allows us to compare the trading signals of charts with various time basis and technical indicators easily as demonstrated in Figure 2. 

According to Figure 2 (a), a buy signal has been released on 2^nd July 2018 but it does not tell whether it is still in uptrend at the moment. When we proceed to Hourly chart (Figure 2 (b)), it is showing that the buy signal appeared on 13^th July 2018 but +DI is moving closer to -DI at the moment. Figure 2 (c) and (d) show a sell signal indicating the share price movement is approaching downtrend currently. Hence, we should start clearing our position at the moment instead, as the presence of sell signal has been confirmed.

Conclusion

ADX indicator calculations are complex but its interpretation is straightforward and practical. However, false signals might happen, as the crossover of +DI and DI- can occur quite frequently. Thus, different trading strategies including EMA 5 Crossover, MACD and RSI, OBV Breakout and Guppy MMA can be used to filter the false trading signals.

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Disclaimer

This article does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties in the Internet. We may or may not hold position in the stock covered, or initiate new position in the stock within the next 7 days.

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