LEARN AVERAGE DIRECTIONAL INDEX IN 3 MINUTES – BLOCKCHAIN 101 

What is ADX

The Average Directional Index (ADX) is a technical analysis indicator used to quantify the strength of a market trend. It was developed by Welles Wilder in 1978 and is primarily used to identify whether a trend is present and how strong that trend is. The ADX value ranges from 0 to 100 and is often used in conjunction with other indicators to provide more comprehensive trading signals.

The ADX consists of three lines

1. ADX Line: Indicates trend strength.
2. +DI Line(Positive Directional Index): Shows the strength of the current uptrend.
3. -DI Line (Negative Directional Index): Shows the strength of the current downtrend.

How to Calculate ADX

Although the calculation of ADX is relatively complex, it can be summarized in the following steps:

1. Calculate +DI and -DI.
2. Calculate ADX, typically using a 14-period moving average.

The formulas are as follows:

1. +DI = (Current High – Previous High) / True Range × 100
2. -DI = (Previous Low – Current Low) / True Range × 100
3. ADX = 14-day moving average of the absolute difference between +DI and -DI

How to Interpret ADX

1. 0-25: The market is in a non-trending state.
2. 25-50: A trend is starting to form, which may be a good trading opportunity.
3. 50-75: Strong trend, traders should consider trading in the direction of the trend.
4. 75-100: Extremely strong trend, exercise caution and avoid trading against the trend.

Applications of ADX

1. Confirming Trends: When ADX rises and exceeds 25, it indicates that a trend is forming; conversely, it may indicate a non-trending state.
2. Combining with Other Indicators: Using ADX in conjunction with other indicators (such as the Relative Strength Index RSI or moving averages) can enhance the accuracy of trading signals.
3. Stop-Loss Strategy: Adjust stop-loss positions based on the strength of ADX to avoid trading in a non-trending state.

Conclusion

The Average Directional Index (ADX) is a powerful tool for traders looking to gauge market trends and make informed decisions. By understanding how to interpret its signals, traders can enhance their strategies and potentially improve their profitability.