Technical Analysis Explained

How to Trade the ADX/ADXR indicator

  • The ADX indicator consists of 3 components.
  • The +DI line – shown on green color.
  • The -DI line – shown on red color.
  • The ADX line – shown in grey color.
  • The +DI and -DI lines give buy and sell signals and the ADX line shows the trend strength.

Buy / Sell Signals From The ADX Indicator

  • +DI line crossing above the -DI line is a buy signal.
  • +DI line crossing below -DI line is a sell signal.
  • The ADX line rising is a trending market.
  • When the ADX line is above 25 and rising it is a properly trending market. The higher the ADX value the greater the trend strength.
  • On the other hand ADX line falling and below 25 denotes a range.

So a trader can change his / her trading style using the ADX. When the +DI is above -DI with a rising and high ADX reading, he should consider only buy orders (either buy on breakouts or buy the pullbacks). And when the +DI is below the -DI with a rising and high ADX reading he should only consider short-selling orders (either short sell on breakdowns or short sell on pullback rallies).

In a lower ADX reading below 25 or best below 20, a trader should employ range bound trading techniques, using overbought / oversold indicators, such as Stochastic and RSI. He can buy on dips as well as short sell on rallies. You can use both the methods on intraday (15/60 minutes chart) or swing trading (hourly / daily / weekly charts).

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