ADX can show us how trend is strong
below 20: the market is currently not trending
crosses above 20: signifies that a new trend is emerging. Traders may start placing sell or buy orders in the direction of the price movement.
between 20 and 40: When the is growing between 20 and 40 it is considered as a confirmation of an emerging trend. Traders should use this opportunity to buy or short sell in the trend's direction.
above 40: the trend is very strong.
crosses 50: the trend is extremely strong.
crosses 70: a very rare occasion, which is called a “Power Trend.”
If we use with DI+ and DI+ indactor can tell us to buy.
How can we calculate this all?
(DI) is defined as the largest part of the current period’s price range that lies outside the previous period’s price range. For each period calculate:
= positive or plus DI = High - Previous High
= negative or minus DI = Previous Low - Low
The smaller of the two values is reset to zero, i.e., if > , then = 0. On an (a lower high and higher low), both and are negative values, so both get reset to zero as there was no for that period.
The True Range ( TR ) is calculated for each period, where:
TR = Max of ( High - Low ), ( High -PreviousClose ), ( PreviousClose - Low )
The , and TR are each accumulated and smoothed using a custom smoothing method proposed by Wilder. For an n period smoothing, 1/n of each period’s value is added to the total each period, similar to an exponential smoothing:
+DIt = (+DIt-1 - (+DIt-1 / n)) + (+DIt)
-DIt = (-DIt-1 - (-DIt-1 / n)) + (-DIt)
TRt = (TRt-1 - (TRt-1 / n)) + ( TRt )
Compute the positive/negative Directional Indexes, and , as a percentage of the True Range:
= ( / TR ) * 100
= ( / TR ) * 100
Compute the Directional Difference as the absolute value of the differences: DIdiff = | (( ) - ( )) |
Sum the directional indicator values: DIsum = (( ) + ( )) .
Calculate the index: DX = ( DIdiff / DIsum ) * 100 . The DX is always between 0 and 100.
Finally, apply Wilder’s smoothing technique to produce the final value:
ADXt = ( ( ADXt-1 * ( n - 1) ) + DXt ) / n
When indicator tell us to buy?
If when DI+ crosses DI- and is bigger than DI- indicator tell us to buy.
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