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ADX - How To Use This Incredible Indicator Successfully

Meet the Inventor
The Average Directional Index (ADX) is one of several widely used technical analysis tools developed by market guru J. Wells Wilder. After varied career as a naval mechanic, mechanical engineer, and successful real estate developer, Wilder found himself at the age of 38 with a considerable sum of money in the bank and not much to do. Commodity trading soon became the main outlet for his energies. After experiencing only mixed success as a trader, Wilder stopped trading and started studying. Unimpressed by the technical trading tools then available, he began to develop his own trading systems. In his 1978 book New Concepts in Technical Trading Systems, Wilder introduced four completely new technical trading tools that established him as a leading innovator in the field. Since 1978, Wilder has made a new career of developing increasingly sophisticated trading systems and running seminars on technical trading, while continuing to trade on his own account. While Wilder tends to focus on commodities, his trading systems have been applied to all types of tradable financial assets.

Understanding the ADX

The ADX is a composite measure derived from two earlier Wilder innovations: the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI). It is

Fonte: http://www.candlestickgenius.com/adx.html

VISITE MEU BLOG: http://dmne.blogspot.com common to see all three indicators charted as lines on the same graph.

The algorithm used to calculate the +DI, -DI and ADX is quite complex. Roughly speaking, the +DI can be thought of as the percentage of upward movement in securitys price over a given period, while the DI corresponds to the percentage of downward movement. Used in combination, the DI and +DI can be used to diagnose market trends. The ADX, which is also charted on a 100 point scale, indicates the extent to which the price is following a trend. In other words, the ADX measures the degree to which price movements are being driven by momentum. An ADX below 20 indicates a weak trend, while any reading above 40 suggests that momentum is driving the market. Readings above 60 are rare and would indicate a very strong, possibly unsustainable trend. It is important to understand that the ADX measures only the strength of a trend, not its direction. Strong upward and downward trends both yield high ADX values, while vague upward and downward trends result in low readings.

Trading with the ADX

The ADX system is based on diagnosing market trends. If a market has no discernable trend, then the system will not generate any useful trading signals. More specifically, if the ADX is below 20 or the line drops below both the +DI and DI lines, it is time to stop relying on the ADX system.

Fonte: http://www.candlestickgenius.com/adx.html

VISITE MEU BLOG: http://dmne.blogspot.com When there is a discernable market trend, or in other words the ADX line is above 20 and above at least one of the DI lines, the ADX system provides useable signals. In these times traders employ three basic trading rules: The Crossover Rule states that if the +DI line crosses above the DI line, it is time to buy. Conversely, if -DI line crosses above the +DI line, it is time to establish a short position. Essentially, the +DI and DI lines crossing signals the beginning of a new market trend. The Extreme Price Rule states that traders should observe the extreme price (i.e. intraday high or low) on the day in which the +DI and DI lines cross and wait until that price is surpassed on the following day before executing the trading action specified by the Crossover Rule. Basically, this works to ensure that a new trend is definitely underway before any trades are made. The Turning Point Rule states that if the ADX line turns downwards while it is above both the +DI and DI lines, traders should prepare to exit their current trade, as this is an early warning that a turning point is on the way.

Does it Work?
Believers in the Efficient Markets Hypothesis tend to dismiss technical trading systems like the ADX as having no scientific basis. However, Efficient Market Hypothesis is not universally accepted. Critics often point to well documented anomalies, such as the apparent role of momentum in determining price movements, as evidence that markets are not strictly efficient. If you can predict what a stock price will do tomorrow based on what it did today, the market in that stock is considered inefficient. The underlying basis of the ADX system is this idea that, at least in the short run, momentum drives prices. In other words, if the price of a commodity or stock has been rising recently, it is more likely than not to rise again tomorrow. While it may not make efficient markets theorists happy, there is significant academic support for this belief, which may in turn by why the ADX is very popular with traders. Copyright 2008 Mark Deaton

Fonte: http://www.candlestickgenius.com/adx.html