How to Use the Adx Indicator
The ADX indicator measures the effectiveness of a trend and will be beneficial to determine in case a trend is strong or weak. High readings indicate a solid trend and low readings indicate a weak trend. When this indicator is showing a minimal reading a trading range will probably develop. Avoid stocks with low readings! You intend to be stock trading which have high readings.
This indicator means Average Directional Index. On some charting packages you can find two other lines on the chart, +DI and -DI (the DI part means Directional Indicator). Ignore these lines. Attempting to trade in accordance with both of these lines is a good way to lose cash! The thing that we are worried with may be the ADX itself.
Note: This indicator measures strong or weak trends. This could be the strong uptrend or perhaps a strong downtrend. It generally does not let you know if the trend is up or down, it just lets you know how strong the existing trend is!
If ADX is between 0 and 25 then your stock is in a trading range. Chances are just chopping around sideways. Avoid these weak, pathetic stocks! Once ADX gets above 25 you then will quickly start to see the beginning of a trend. Big moves (up or down) have a tendency to happen when ADX is right for this number.
When the ADX indicator gets above 30 you then are looking at a stock that's in a solid trend! They are the stocks you want to be trading! You will not see lots of stocks with the ADX indicator above 50. Once it gets that high, you begin to see trends arriving at a finish and trading ranges developing again.
So what's the ADX indicator best for?
This indicator is most beneficial useful for screening stocks and writing scans. With the addition of this indicator to your scanning software, it is possible to eliminate all the stocks which are in trading ranges. After that you can create your scan to get only those stocks which are in strong uptrends or strong downtrends.
The ADX indicator will not give buy or sell signals. It can, however, offer you some perspective on where in fact the stock is in the trend. Low readings and you also have a trading range or the start of a trend. Extremely high readings let you know that the trend will probably come to a finish.