The technical indicator ADX (Average Directional Index) determines the presence of a price trend, and also shows the strength of the trend.
The indicator was developed and described by J. Welles Wilder in the book “New concepts in technical trading systems” in 1978 and by the recognition of the author himself is his favorite invention. The indicator was created to identify a long-term market trend and determine its strength for trading in the stock market and a day time frame.
Visually the indicator is two opposite lines +/- DI and the curve ADX:
• line +DI — indicates an increase in the price of the asset;
• line -DI — indicates a decrease in the price of the asset;
• ADX line — indicator of the trend situation in the market (trend or flat).
In general, the indicator can be attributed to the class of oscillators. It ranges from 0 to 100. The value below 20 indicates that the trend is weak, and the indicator of the Average Directional Index in the range from 20 to 40 is that the trend is strong. Values from 40 to 60 indicate a very powerful trend, more than 60 ADX is extremely rare. Average Directional Index does not determine the direction of the trend, but measures only its strength.
If there is any trend in the market – bullish or bearish – the distance between the DI signal lines starts to increase and ADX starts to grow and, conversely, when the activity on the market decreases – the distance between the DI signal lines starts to decline and the ADX drops.
Setting the indicator
To configure the indicators, you must enter a separate window of the Technical Analysis at the Olymptrade platform. The indicators are found in the Trends section when selecting “Indicators form” in the Indicators tab:
Settings of the indicator (period) should be left standard — 14. Also sometimes 12, 18, 21-periods of ADX are used. As an additional guide for setting parameters periodically values ranging from 7 to 30 are used.
In general, as the period increases, the information on the trends will be more reliable, but the calculation of the indicator will take more time, you can skip a significant part of the trend by the time the indicator reports about it. Using the lowered periods of calculation will allow to receive information on many trends faster, but more such signals will be false.
You can also add 2 lines at level 20 and 40 to orient the ADX values using the Horizontal line tool.