ADX + DMI v.checkm8

13 Mar 2018

Hello & welcome to my custom version of the ADX & DMI indicator.

The average directional index and directional moving indices are a godsend and I think you should incorporate it into your trading.

Here's a quick how-to:

The ADX , despite its name, is a directional index but only represents the strength of the dominant trend, which is marked by the DMIs ( +DMI and -DMI ). To interpret this, a rising ADX signifies that the dominant trend is gaining strength or momentum, while a falling ADX represents the weakening of the dominant trend. My indicator paints the ADX black if it is rising (trend gaining strength) and white if it is falling (trend losing strength). The ADX also has a critical level of 20, which signifies whether or not a trend actually exists. For example, if the ADX is above 20, there is a trend in effect, but if it is below 20 - there is no definite trend in play, even if the price may be rising or falling. On my indicator, the ADX turns grey when it is below 20 to signify the irrelevance of the dominant trend at such points. To better explain this, it does not matter which DMI dominates when the ADX is below 20, as it can be interpreted as a very weak move.

There are two DMIs, represented by +DMI (blue), which represents bullish momentum, and -DMI (red), which represent bearish momentum. If the +DMI dominates the -DMI , a bullish trend is most likely at play, and if the -DMI dominates the +DMI , a bearish trend most likely prevails. The ADX must be considered in this, as a +DMI dominance over -DMI when ADX is below 20 could be interpreted as "chop", with no clear directional signals, while the same dominance on a rising ADX will represent a strong momentum in favor of the dominant DMI.

The aim of the indicator is to identify trend reversals and give signals to newly developing trends. Crossovers are a key element, as they dictate which DMI dominates the playing field.

Additional notes:

1) The strongest possible position you can have is one where the DMIs have a crossover on an ADX that is perking or sloping upwards.

2) You should be exiting your positions at the peak of the ADX , shown by the color changes, as this is often the furthest extent of the dominant trend. Once the ADX tips, the trend weakens and is less likely to see continuation. NOTE: Divergences are possible, where the ADX may be falling, but the dominant trend sees continuation. This simply means that the dominant trend is weakening, but still going.

3) The indicator has green and red bars to show which trend dominates. If the +DMI is above -DMI , the area until the next crossover will be green, while a -DMI dominance over +DMI will show a red area until the crossover.

4) If you have any questions, feel free to reach out and ask me!