Technical analysts use ADX or average directional index as a technical tool to make trading decisions. The ADX is used to analyze what the strength of the current trend is. ADX is used to know what the trend is and how strong the current strength is. This is regardless of whether the trend is up, down or sideways.
The ADX is plotted using lines which are known as the directional movement indicators.
What is ADX?
The ADX indicator uses three lines and these are used to tell the trend strength. When the +DI is above the –DI then this indicates that buying is strong. The opposite applies when the –DI is above the +DI.
The ADX line, however, lets you know the strength of the current trend. When the ADX reading is above 20 then the trend is formed. When the ADX line is below 20 then this means that a trend is still to be formed.
The ADX indicator is calculated over a 14 day time period and this can be applied to a chart of any time frame. The ADX is used by technical traders to find out the entry and the exit signals as well as help him know if the trend of the market is strong. This lets him either be a buyer or a seller in the market. Check ADX full review here.
Strategy of crossover
When the +DI crosses above the -DI line then this indicates that you should be a buyer in the market. However, make sure that you do not blindly follow it but see for yourself what the trend is. The ADX could be lagging and also at times, the indications could be confusing. You could use the ADX indicator with a moving average on the chart. Take a longer-term moving average like the 50 or the 100-period moving averages. This will confirm the trend for you.
Momentum of trend
The ADX is used clearly to know whether the trend is gaining or losing the momentum. Momentum is nothing but the price velocity. When the peaks are higher then this means that the momentum of the trend is increasing. Similarly, when the peaks are lower then the momentum is decreasing.
The strength of the trend
The ADX is used to identify what is the strong trend that you can trade in. The value is important because it helps to decide on the condition of the trend. An ADX reading over 25 will let you know that the strength of the trend is strong. An ADX reading below 25will let you know that the trend is weakening.