Full Chinese name: Average Trend Index
Full English name: Average Directional Index or Average Directional Movement Index
The ADX index reflects the degree of trend change, not the direction itself. Foreign investors often use ADX indicators, but domestic ones use less. However, when writing trading systems, they often use ADX or ATR indicators to determine consolidation, oscillation and unilateral trends.
The average trend indicator ADX is another commonly used trend measure. ADX cannot tell you where the trend is going. However, if a trend exists, ADX can measure the strength of the trend. Regardless of the uptrend or the downtrend, ADX looks the same. The larger the ADX reading, the more obvious the trend.
When measuring the strength of the trend, you need to compare the ADX readings over several days to observe whether the ADX is rising or falling. An increase in the ADX reading means a stronger trend; if the ADX reading drops, it means a weaker trend. When the ADx curve climbs upward, the trend becomes stronger and stronger, and it should continue to develop.
If the ADX curve declines, it means that the trend begins to weaken and the possibility of reversal increases. As far as ADX itself is concerned, because the indicator lags behind the price trend, it is not a good indicator, and it is not suitable to operate on ADX alone. However, if used in conjunction with other indicators, ADX can confirm whether there is a trend in the market and measure the strength of the trend.
Adx indicator definition
TR = SUM(MAX(MAX(HIGH-LOW, ABS(HIGH-REF(CLOSE,1))), ABS(LOW-REF(CLOSE, 1))), N)
HD = HIGH-REF(HIGH, 1)
LD = REF(LOW, 1)-LOW
DMP = SUM(IF(HD>0 AND HD>LD, HD, 0), N)
DMM = SUM(IF(LD>0 AND LD>HD, LD, 0), N)
PDI = DMP100/TR MDI = DMM100/TR
ADX = MA(ABS(MDI-PDI)/(MDI + PDI)*100, M)
The variables and functions are defined as follows:
CLOSE: Quote the closing price (refer to the latest price in the market)
HIGH: Quote the highest price
LOW: quote the lowest price
REF(X, N): Quoting the value of X N cycles ago
ABS(X): Find the absolute value of X
MAX(A, B): Find the larger of A and B
SUM(X, N): Get the sum of X in N cycles
IF(C, A, B): If C is established, return A, otherwise return
In addition, PDI is abbreviated as +DI, MDI is abbreviated as -DI; parameters: N=14 (default), M=14 (default).
In this example, the ADX indicator hovered below 20 from the end of September to early December. From the chart, we can see that the EUR/CHF has been trading sideways within the range during this period. However, since January, the ADX indicator began to break above the 50 line, which shows that the exchange rate may start a strong trend process.
Next, you will see that the EUR/CHF fell below the bottom support of the range and started a strong downward trend. Oh, this is a decline of about 400 points.
How to use ADX indicator
The application of ADX is divided into two parts. First, use the trend chart, trend line or moving average to determine the development direction of the trend, and then use ADX to determine the strength of the trend. Regarding the basic idea of trading, I think the daily chart is more suitable, because the intraday chart is too volatile and there are often repeated signals.
The reading and development direction of ADX are both important. Generally speaking, if the ADX reading is 30 or above, the trend can be regarded as strong.
If the ADX reading is lower than 20 (for example, periods A and B in Figure 6-9), it means that the market momentum is weak. During the period, the market moved back and forth, with no obvious direction. As for the reading between 20 and 30, it is a neutral reading. The higher the ADX reading, the more obvious the trend. Even if ADX falls, as long as the reading is higher than 30, the market still has considerable momentum. When ADX climbs upwards, it should only follow the trend direction.
When entering the market, although it is best to wait for the market to return, if the ADX reading is large, it is unlikely that there will be a real return. Knowing the real market conditions can often choose the appropriate system. For example, one system is used to deal with the market with ADx lower than 20, and another system is used to deal with the market with ADX higher than 30.
- The ADX index reflects the degree of trend change, not the direction itself.
- Entry and exit are through signals of +DI and -DI. When the red line crosses the green line downwards, it is usually considered to be a trend.
- When the position of ADX is higher than the two DIs and the direction changes, this is an early signal of a trend reversal, and you can mainly wait and see.
- If the ADX is higher than the two DIs and the reading is obviously higher, it means that the existing trend has been going on for some time. This is not the ideal time to establish a reversal, because the signal is likely to repeat. In other words, the high reading of ADX is equivalent to overbought/oversold.
- If ADX is lower than two DIs at the same time, avoid adopting the system of homeopathic trading, because the trend is not obvious at this time, so wait and see.
- If the ADX reading is lower than 20-25, regardless of its relative position with the two DIs, avoid using the system of homeopathic trading, because the trend is not obvious at this time, so wait and see.
- Example: Under the premise that ADX is a dotted line, +DI is a red line, and -DI is a green line: the red line goes on, the green line goes down, and the dotted line is in line with the up line, then the K value increases; if the green line goes on and the red line goes down, And the dotted line coincides with the up line, the K value drops.
- Under normal circumstances, it can be simply understood as: the ADX line represents the strength of the strength, and whoever has the advantage of +DI and -DI rises with the strength, then it represents the direction of the current trend.