What is Average Directional Index (ADX)
Average Directional Index (ADX) is simply one of the best technical indicators out there in the stock market. The indicator is developed by Welles Wilder who also created a bunch of other technical indicators such as RSI and SAR Indicators.
What does ADX do?
The ADX looks at trend strength, but does not take into account the trend direction. The ADX comes with 2 other indicator that defines the direction. They are +DI and -DI.
How to use the ADX technical indicator?
When +DI is greater than -DI, it generates a bull signal, and when -DI is great than +DI, it generates a bear signal. The trend is strong when ADX is above 25 and trend is weak when ADX is in the range of 20 and 25. There is no trend when ADX is below 20.
How to trade ADX using stock charts?
Let’s look at the following live MGM stock chart.
ADX Selling Signal: When -DI cross over or above +DI on August, the stock generates a bearish or a sell signal. At the same time, the ADX is near 30 which is way above 25(strong trend). That means the trend is strong and it is a bearish one. The stock then went from $13 a share to $9 in less than half a month. That is a 30% dropped.
ADX Buying Signal: When +DI cross over or above the -DI in late December, it generates a bullish signal. However, the ADX is just around 20, so the trend is not that strong yet the stock rallies after the bullish signal.
Is ADX the best technical indicator?
I won’t say ADX is the best technical indicator out there, but it is one of the best. If you combine this indicator with MACD, Stochastic and Candlestick, you will get good signals from the stock market.
