The Average Directional Index (ADX) is a technical analysis indicator used to quantify the strength of a trend in a market, regardless of its direction. It helps traders determine whether the market is trending or moving sideways, without indicating the trend’s direction.
Key Features of ADX:
- Range: The ADX moves between 0 and 100.
- 0 to 25: Weak or non-existent trend (sideways or ranging market).
- 25 to 50: Strong trend.
- 50 to 75: Very strong trend.
- 75 to 100: Extremely strong trend.
- Trend Strength Indicator: Unlike other indicators, the ADX does not specify the direction of the trend, only its strength. It is often used in combination with Directional Movement Indicators (DMI+ and DMI−) to assess whether the trend is bullish or bearish.
How ADX Works:
The ADX is calculated based on the moving average of the price range expansion over a specific period, usually 14 periods. It helps traders decide whether to enter or exit a trade based on the strength of a trend.
- Rising ADX: A rising ADX indicates that the trend is gaining strength, whether it’s an upward or downward trend.
- Falling ADX: A falling ADX suggests that the trend is losing momentum or that the market is in a consolidating phase.
Usage in Trading:
- Above 25: If the ADX value is above 25, the market is considered to be trending, and traders often use other indicators to decide on entry points.
- Below 25: If the ADX is below 25, the market is likely moving sideways or in a weak trend, and traders might avoid trend-based strategies.
Example in Saga (SAGA):
With an ADX value of 32.235, it indicates that Saga is experiencing a moderately strong trend. This suggests that the current market movement has momentum and the trend is likely to continue for some time. Traders might view this as a signal to follow the existing trend, depending on other supporting indicators.
