In previous articles, Vietnam-Ustrade.org has shared with users some Wilder investment indicators such as: ADX, DMI indicator,… Today, Vietnam-Ustrade.org will introduce another Wilder investment indicator called the Average Directional Index – ADX. The following article will provide some information related to ADX, helping users better understand this investment indicator.
What is the ADX (Average Directional Index)?
ADX stands for Average Directional Index, a tool used to help identify trends and market direction in the financial market. This indicator was discovered and developed by Welles Wilder to create a measurement system that helps users best predict when to enter or exit a position.
Furthermore, ADX also helps investors know when the market is strongly trending or weakly trending to make informed investment decisions. Perhaps because of this, ADX is considered by users as a comprehensive market indicator, calculated based on market fluctuations over a certain period, usually around 14 days.
When observing the market, users should pay attention to the peaks and troughs of the ADX indicator. A peak in ADX indicates signs of an uptrend, while a trough suggests a downtrend. However, the market is always variable and unpredictable, so when relying on the ADX, users should also consider entry timing for optimal profits.
How to calculate the ADX
The ADX is usually calculated and presented as a line chart for easy observation. However, to understand ADX better, Vietnam-Ustrade.org provides some formulas for calculating ADX. Let’s explore together!
These formulas are quite complex and involve indicators such as +DI, -DI, +DM, and -DM. +DI indicates the positive directional index of the market, and -DI indicates the negative directional index. +DM is the positive directional movement, and -DM is the negative directional movement. Based on these, users can calculate the indicator. However, not everyone can perform these calculations, so users generally rely on ADX data provided by systems for market analysis and trading decisions.
What are the uses of the ADX?
Like most Wilder indicators, ADX is a support tool for investors to predict market trends. However, users often hesitate to use ADX in all types of trading indicators because ADX not only predicts market trend directions but also provides additional market information such as: when to enter exactly, when not to enter, or the strength of the market trend, etc.
The ADX is built on the moving averages of the market over a certain period, based on user settings. When configured, the system shows a line graph representing ADX. Users observe the fluctuations of this indicator to infer market direction. Nevertheless, no tool can predict the market with absolute accuracy, so investors should use ADX in conjunction with their knowledge for better decisions.
Guidelines for installing the ADX indicator
The steps to install the ADX are simple and similar to setting up the ATR indicator. Users just need to go to “Insert”, select “Indicators”, click “Trend”, and then choose the “Average Directional Movement Index” from the indicator setup window.
Guidelines for using the ADX indicator
The ADX helps users forecast the trend direction of the financial market. When observing the market, users should pay attention to certain cases indicating ADX signals:
When the market shows an “Up Trend” or “Down Trend”, the ADX tends to increase or decrease steadily. A reading below 20 indicates a sideways market; in this case, users should avoid entering positions as there is no clear trend. A sudden rise of ADX from below 20 to above indicates a new trend might be starting, suitable for entry. If ADX rises from 20 to 40, it suggests the market continues strong or weak in the current trend. An ADX value over 40 indicates a robust trend. When ADX crosses at 50 during an uptrend, the market might be extremely strong, and crossing above 70 is very rare.
Conclusion
Vietnam-Ustrade.org has compiled and shared all related information about the ADX indicator — one of the essential tools for serious traders in the financial markets. We hope this article provides useful knowledge about the ADX (Average Directional Index), helping investors make informed decisions in this volatile market.
See more: RSI indicator
