INTRODUCTION

Trading is better when we have a clear idea what is happening in the market. This led to the invention of many indicators that show us where the market should/will head to. However, knowing the direction of the trend alone could be at your disadvantage if the market makes a switch while you’re riding the trend. This led to the need for an indicator to also measure the strength of the trend, that way, traders can know how reliable this trend is, and take action based on that. This led to the ADX indicator.
Seeason 3 week 7 in the advanced class of the steemit crypto academy. Professor, @kouba01 took his time to give us a total breakdown on how the ADX indicator work. Using the outline below, this post aims to successfully complete the task we were given.

• What is ADX? how to calculate ADX.
• Using the ADX, DI+ and DI- on your Chart
• Why use DI+ and DI- with ADX?
• Trading trends and Concept of false signals
• Breakouts, Using ADX to validate them.
• ADX in scalping and swing trading. Which is better?
• Conclusion

ADX INDICATOR

J. Wilder jr. decided to solve the problem of “how strong is this trend?” by inventing a moving average based indicator, the ADX. The ADX calculates the strength of the trend in a range of 0-100. It plots a moving average using a period of 14. The range table below shows how the indicator is read.

ADX values	Indications
0-25	No strongly valid trend/ weak trend
25-50	valid trend
50-75	very strong trend
75-100	Extremely strong trend

The ADX is an organ in a system, this system includes the DMI (directional movement indicator) which is inclusive of two moving averages; DI+ and DI-. Now we know measuring the strength of the indicator is cool, but what if it could tell the direction, by measuring the bullish and bearish strength? That my friends is where we get the DMI. The DI+ measures bullish strength, DI- measures bearish strength.

adx indicator

adx with DI+ and DI-

---

---

CALCULATING ADX

J Wilder was a mathematician, it is no surprise his work was a product of mathematics and as such had an underlying formula. Calculating the ADX requires understanding various parameters. This calculation breaks down ADX from the bare minimum level;

1. First derivates as we journey down to the ADX formula are the DMI+ and DMI-

One bullish move is not enough to convince a trader on a trend, Wilder therefore decided to use two sessions each to measure the market sentiment and how strong it is.This means he patiently recorded 2 consecutive sessions of the market, exhibiting the same sentiment, and measured the difference in price between them. This calculation showed how strong the buyers and/or sellers were.
if after 14 periods, price increased, the DMI +will be calculated as 100, and DMI- will be 0, vice versa.

DMI + = high of the day - previous high
DMI - = previous low - low of the day

2. Next we find the True Range (TR)

The True range is simply the greater value obtained after calculating the difference between the high and the low of the day, the high of the day and the close of the day before, the low of the day, and the close of the day before.

If;
PD = The price of the day
PL = The lowest price of the day.
PH = The highest price of the day.

Then true range is;

TR = MAX (|PH - PL|; |PH - PD|; |PL - PD|)

4. Next the DI + and DI–

DI + = DMI +/ TR
DI- = DMI- /TR

5. Finally, the ADX:

Where n = number of periods;

ADX = Sum of n [((DI +) - (DI-)) / ((DI +) + (DI-))] / n

ILLUSTRATION

Assuming faced with a high of 25, a low of 10, and close of 20 in the previous session and a High of 40, low of 10 and current price of 35, calculate the ADX.

Solution:

DMI+ = 40 - 25 = 15
DMI - = 10 - 15 = 0

TR = (40-10);(40-35);(10-35)
TR= (30);(5);(-25)
TR= 30

DI+ = 15/30 = 0.5
DI- = 0/30 = 0

ADX = n [((DI +) - (DI-)) / ((DI +) + (DI-))] / n
= 2 [(0.5 - 0) / (0.5 + 0)] / n
= 2 [ 0.5/0.5]/n
= 2[1]/2
ADX = 1
There is a weak trend or no trend at all, but this is just the result of two candles, difficult to determine a trend from that. 10 candles or more will make a difference.

USING THE ADX, DI+ AND DI-

1. log into your trading view account, one the chart you wish to analyze
   

2. Select indicators, when you see a dropdown menu, search for "directional movement index", use the built-in version.
   

3. The indicator appears below the chart, select the settings icon as shown below, you'll see a menu to input parameters. I use period of 14 for my DI+/- and ADX
   

4. We can now see the indicator,
   orange line = ADX
   yellow line = DI -
   purple line = DI +
   

Do you need to add DI+ and DI- indicators to be able to trade with ADX? How can we take advantage of this indicator?

No. While you don't need to use the DI+/- with the ADX, they give you an added advantage. DI+ shows how strong the buyers are. It measures the bullish sentiment on the other hand, DI- shows the strength of the sellers, measuring bearish sentiment.

From the above information, we come to the understanding that while knowing the strength of the trend is good, adding the DI+ and DI- gives you an edge; You get to compare the strength of the bullish and bearish sentiment, and know if the trend will soon reverse. Yes you can argue that the two combined give you the ADX so they are not needed, but then the ADX will not show you the gap between the buying and selling power, and will not show you the direction of the trend.

From the above chart,, we can see the inclusion of DI+ and DI- showing us the more dominant sentiment and just how much dominance they were exhibiting. The ADX as it should, did well to measure the strength of the trend, but the DI+ and DI- gave more insight.

Taking advantage of this indicator is simple, allow it to show you the strength of the trend. Of course it is not an indicator you will want to use alone, as it offers no insight on entry and exit points of the trade, however, with this, you can know if you are early enough to catch a strong trend, and most importantly, if you have doubts about market sentiment, the DI+ and DI- will clear it up.

What are the different trends detected using the ADX? And how do you filter out the false signals?

The ADX does not accurately determine the ongoing trend, it can, however measure the strength of the trend. While measuring strength, trends can be;

NO/ WEAK TREND

With ADX ranging from 0 to 25, this is usually seen in sideways trends, when there is no definite direction in price. At this point there is an intense battle between the buyers and sellers, low volatility, and no definite trend. This id usually represented with little or no space between the DI+ and DI-. These are not good trading scenarios, however, they're important to watch, to catch the new trend early. The image below depicts a weak trend.

The marked area shows the market in a sideways trend, and from what we can see, price stayed below 25 during this period. If we take a good look, we notice that all three lines are closely packed too

STRONG TREND

With ADX ranging from 25 to 50, This shows us there is a certified trend in the market. Note that this is not an indication of direction, but volatility.

ADX trades above the 25 LEVEL, BUT BELOW 50

VERY STRONG TREND

ADX ranging from 50 to 75, liquidity levels are easily passed here, the market is very sentimental at this point and it rarely lasts very long.

Screenshot taken from Trading view

Super Trend (Extremely volatile)

These rarely occur and are ephemeral. They are results of rasders reactions to news, tweets or events. Earlier this year we had so many instances where this occurred because of a listing on Binance or so. Volatility is high and traders smartly avoid this, although some take the risk too.

---

---

Filtering False Signals

1. LONG PERIODS
   This method is perfect for filtering false signals. The default settings for ADX is the 14 period, imagine using a 30 period ADX. The smaller the period, the more reactionary the indicator, so this method solves this problem. The only problem with using longer periods is, you end up catching the trend late.

2. INCLUDE OTHER INDICATORS AND/OR TECHNICAL ANALYSIS
   Using 2 or 3 indicators to back the ADX up will help filter false signals. If you can use 2 or 3 more indicators to have more than one confirmation, plus your technical analysis, chances of falling for fake signals reduce.

Explain what a breakout is. And How do you use the ADX filter to determine a valid breakout?

A breakout is the breaking of a resistance level by price, to continue the already established trend. It is simply an evidence of trend continuation, after it might have seemed the trend had come to an end when it was rejected by the price level (resistance) at first. A valid breakout should have strong volume backing it or it could end up being a fakeout.

Using the ADX to determine a valid breakout is a reliable system. ALL you need do is to make sure that at the time of the breakout, the ADX was 25 or more. The higher the better, unless it enters the extremely volatile range. This image below show a breakout, with an adx of about 30.

The image above depicts what a fakeout looks like and how the ADX caught it. on the ADX, the value was 10.8, that is way below 25 and as we can see, the breakout didn't hold, turned out to be a fake out.

#.What is the difference between using the ADX indicator for scalping and swing trading? What do you prefer between them? And why?

SCALPING	SWING TRADING
To scalp with the ADX, use s short period, 7-30	To swing trade, use a longer period, 51-100, this will save you from market movements without any real influence
Scalping with ADX will require combination with other indicators for proper confirmation	Swing trading over long periods with the ADX requires specifically the pivot point indicators and Ichimoku
Shorter timeframes 1-5 minutes should be used for scalping	SWing trading should be with 2hr time frame up to 1day
It cannot be totally relied upon to measure strength of trend, since shorter time frames react to insignificant occurences	More reliable as it is more resistant to false signals here

---

---

I am a swing trader and will pick swing trading over scalping because with swing trading I;

1. don't need to keep watching the chart for hours
2. Accumulate larger profits over time
3. Avoid fakeouts easier
4. Reduce chances of false signals
5. Swing trading lets you enjoy the trend till its climax

CONCLUSION

I do highly recommend the ADX. Over longer periods, you may not get so many signals, but when they do come, they are good signals. I like the 50 moving average for the ADX.

Using the ADX with the ichimoku kinko hyo is a good choice for me, and also, only take action when the ADX is at least at 30 or above it. With the ADX, you can monitor the progress of an ongoing trade and when the trend loses fuel, you will be able to get out of the market before the reversal happens.

Of course trading will always be risky, all we can do is stack the odds in our favour but still trade with caution and use good risk management. Thank you @kouba01 for this task .

COPYRIGHT:

ALL IMAGES WERE DESIGNED BY ME, UNLESS OTHERWISE STATED
SCREENSHOTS WERE TAKEN FROM MY tradingview.com ACCOUNT