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ADX: determining the strength of price movementBefore reading this lesson, you should have previously read through:

Indicators: an introduction

The ADX (average

directional index) isan indicator that showsyou ho w str onga trend is.

The ADX gives you areading that generallyranges between 0 and50. The higher thereading, the strongerthe trend. The lower

the reading, the weaker the trend.The ADX is very useful as a confirmation tool when you want to trade in a trending market,but it will not give you reliable buy or sell signals on its own.

Using ADX to measure the strength of a trend

The ADX consists of three lines, which all measure price action in slightly different ways:

The ADX line

The DI+ lineThe DI- line

The chart below shows what the indicator looks like:

DI+ line DI- line Main ADX line

The straight red line passing horizontally through the middle of the indicator box marks the25 level.

If the blue ADX line moves below this 25 level it indicates a ranging market or a trend that istoo weak to trade. If it moves above the 25 level it indicates a strong trend has now been

The ADX indicator measures how strong a trend is. It does notprovide buy or sell signals, so it is best used with otherindicators.

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A reading between 30 and 50 signals an extremely strong trendthat has a high probability of generating a profit. A reading over50 means the trend is at its peak and no new trades should beattempted.

established.

A reading of between 30and 50 signalsa strong trend.

If the ADX linereaches ashigh as 50,however, thetrend isconsidered atits peak andno new trades

should beattempted, as

the market very often reverses from that point.

The DI+ and DI- confirm whether a trend is up or down

The main ADX line displays the smoothed average of movements in the price. As alreadyexplained, a reading higher than 25 shows you that a trend has been established.

The DI+ and DI- lines meanwhile interact with each other to confirm whether that trend is

up or down.When the DI+ line rises above the DI- line, the trend direction is said to be up. When theDI+ line falls below the DI- line, the trend direction is said to be down.

Take a look at the chart below:

DI+ line crosses above DI- line, indicating any trend is up ADX is above 25, confirming trend Price is in an uptrend

As you can see, the dotted green DI+ line moves above the DI- line, shown at , signallingthe trend direction is up. The blue ADX line is above the 25 level, meaning that the priceis now trending.

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Exercise 1: Where does the ADX confirm a strong uptrend ?

The standard setting for the ADX is 14 periods and can bemodified to suit your trading style.

Show exercise

Changing the ADX periodsThe ADX calculates its reading from a certain number of trading periods (or candles) on thechart. The standard setting is 14 periods, but this can be modified to suit your own tradingstyle.

As a guide, traders generally stick to the range of 7 periods to 30 periods when adjustingthe settings.

The chart below shows how different period settings affect the ADX readings:

In the chart above, the ADX is set to 28, shown in the top left corner of the indicator box.

Using a relatively high setting ilke this smooths out the average price action shown by the ADX line over a longer time frame .

This results in more reliable trend readings. However, it also means that recognising themtakes longer. You can therefore miss a big portion of any price trend by the time the

indicator alerts you to it.Using lower settings will result in more trends being detected earlier, but some of those"trends" can be false.

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In the chartbelow, theindicator is setto 7, makingthe main ADXline appearchoppier:

Settings donot changeDI+ andDI-readings

Take note thatchanging the

ADX settings

will usually

have only anegligibleeffect on theDI+ and DI-lines.

On both of thecharts above,for example,you can seethat the redDI- line movesabove the DI+line. Theythereforeindicate adownward

trend regardless of whether the indicator is set to periods of 28 or 7.

If you do change the settings for the ADX indicator, always check whether your changes areimproving or worsening your trading results. You will learn which settings suit you best

While a lower period setting results in more trends beingdetected earlier, it raises the likelihood of false signals.

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through trial and error.

SummaryIn this lesson, you have learned ...

... the ADX is primarily a trend strength indicator.

... it is a useful confirmation tool but it does not provide buy or sell signals.

... it consists of three lines – the DI+, DI- and ADX lines – which measure price action ina slightly different way.... it provides a reading that generally ranges between 0 and 50.... a reading below 25 indicates a weak trend.... a reading of above 25 signals a strong trend.... a reading of between 30 and 50 signals an extremely strong trend.... a reading of over 50 signals that a trend is at its peak and could soon reverse.... the standard setting for the ADX is 14 periods and traders usually opt for a setting of between 7 and 30 periods.... a higher setting will smooth price action and provide more reliable signals but mightalert you to trends too slowly.... a lower setting will result in more trends being detected earlier but can also providefalse signals.