Average Directional Index (ADX): Facts About How The Indicator Series Works

ADX is a technical analysis indicator that traders use to evaluate the strength of a particular trend. Often, the deviation can either go down or up, and two markers depict these shifts—the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). ADX commonly features three different lines. And these lines usually help to identify whether you should take a short or long trade. Or, guides when you shouldn’t make a trade altogether. 

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How Does The Average Directional Index Work? 

Fundamentally, ADX helps investors to determine trend strength. On the other hand, +DI and -DI are momentum indicators that identify trend direction. When the ADX exceeds 25, it means the trend is healthy, but when the ADX drops below 20, then it indicates a weak trend. Crossovers between the +DI and the -DI lines can also help in generating trade signals. For instance, when the ADX exceeds 20 and the +DI line crosses just above the -DI line, then this is a strong signal to buy. 

Additionally, crosses can also help to cancel or exit current trades. For instance, when on a long trade, you can exit the trade when the -DI crosses just above the +DI. Conversely, when the ADX dips below 20, this might not be the best time to make a trade. 

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Limitations of Utilizing The Average Directional Index (ADX) 

Often, crossovers occur when trading. And sometimes, they materialize too frequently, leading to confusion that could potentially result in losing money on trades. Usually, you can reference these as false signals. More so because this occurs regularly after ADX values drop below 25. However, the ADX sometimes may surpass 25, and subsequently, remain there temporarily only reversing afterward with a change in prices.  Click this link to access an economic calendar for your trading strategies: https://tradingview.go2cloud.org/SH4BV

Conclusion 

Just like any other indicator, you should combine ADX with other technical indicators to help get better signals and ultimately, control risk. This approach will prevent you from losing money when making trades. 

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