Now, the truth is that there are quite a lot of different indicators which are going to be taken into account when it comes to evaluating the strength of different trends. This particular one is actually non-directional which means that it is only going to quantify the strength of the trend, regardless of the direction – whether it is up or whether it is down. The indicator is usually plotted in a chart window, and it comes with two other lines which are known as Directional Movement Indicators or DMI in order to clarify the direction.
The analysis of the ADX Indicator is a method of properly evaluating the overall trend and helping the trader to choose the one which is actually the strongest. There are two general forms of analysis – the technical one and the fundamental one. Now, which one is going to be used is determined on the overall purpose of the analysis.
Now, as we explained above, this is an indicator which determines the strength of the trend. The fact that it’s non-directional means that you would have to take advantage of additional tools such as the DMI in order to determine the upwards or downwards direction. The ADX is used to determine whether the trend is weak or strong. It is going to provide you with the best course of action.
The best way to use ADX is to take advantage of a framework developed by Wilder which takes advantage of both ADX and DMI. Now, the traders will normally start using this indicator if there is a particular trend and a need to determine the strength or whether it is a trend at all. You can conclude that the trend is strong if the ADX reading is over 25. If the reading is below 20, you can conclude that there is no trend at all.
Now, going further on how to used ADX you also need to follow the DI+ and DI- lines. When the former is stronger than the latter, this means that the bulls have the overly directional edge. However, when the opposite happens – this means that the bears are predominant as far as directional edge goes. As it is with the technical trends, the traders use a few different indicators in order to confirm the actual movement. It is usually a good idea to sell when the –DI line is going in an upwards direction as this indicates the bearish market. You can also buy in the opposite situation.