There are numerous trading indicators available on the platform that traders use. As a trader, one of the best decisions that you have to make is to look for a specific strategy and indicator that will help you in the process. Trading is such a tricky world that you have to determine where you are heading to, In short, you have to think in advance. You should not focus on what is just happening today.
To be able to determine the trend, use the right indicator. Many traders agree that the Average Directional Index or ADX is commonly used when you want to identify the strength of the trend. For instance, if a stock keeps on trading in green, the concern will be its stability. How long will this trend persist? Will it stop too soon? Will it be changed any moment now?
The Average Directional Index lets every trader to determine the stocks with the strongest trends. This is the main focus- to evaluate the power of the trend, whether it is up or down. This indicator is commonly used in trading ETF, futures, stocks and mutual funds. The assessment of the trend happens through the help of the DMI or Directional Movement Indicators. (See the figure below)
Typically, the ADX is set in 14 bars, but of course you can use the period of your choice. As you can see in the image above, there are three lines below the trading platform. The gray one represents the ADX while the red stands for -DMI and the green is for the +DMI. The ADX line has values from zero to 100.
Since ADX is non-directional, it shows both the trend upward and the trend downward. If the –DMI stays above the +DMI then it means the price moves down. If the +DMI goes beyond the –DMI, and then it is expected that the price is moving up. What is the role of the ADX? It will be the one which will measure the strength of these trends.
Let’s take a look with a chart of Boeing. In this photo, you can see that the –DMI went above the +DMI. As proven, the price went down. After, look for the value of the ADX line. In this case it stands at 36.9261. Here’s the usual ADX value and its corresponding strength. From 0 to 25, it is believed to be weak or absent; 25 to 50 is a strong trend; 50 to 75 is a very strong trend and 75 to 100 is an extremely strong trend. Therefore, Boeing has a strong downtrend.
Now, let’s try another stock. This is a chart of Alibaba and you have to determine the strength of the trend. Check the –DMI and the +DMI and then determine the value of the ADX line. From what you have discovered, is the price going up? Or is it going down?
Read the chart very well. Take a look at the price, the indicator and then the price movement. Due to market turbulence, breakouts, price range consolidation and significant price movement may happen. Let the ADX help you examine when the trend is strong enough and when the trend is weak enough for you to make a huge trading decision.
Remember, this course is just a basic one and in the coming days watch out for more updates. With the adequate indicator and strategy, you can be the best trader that you wish to be.