The Average Directional Index (ADX) is an indicator to determine the strength of a stock trend. The formula is straightforward: if the ADX is above 25, you can speak of a strong trend; if the ADX is below 20, there is only a weak or no direction. However, the ADX does not give any xrp sales or sell signals.
The focus of the ADX is, therefore, on-trend determination and not on identifying suitable buy or sell points. Welles Wilder developed the indicator in 1978 and presented it in his book “New Concepts in Technical Trading Systems.”
Today many traders use ADX for Ripple, which helps to understand cryptocurrency dynamics. To understand the indicator accurately, we need to look at it in more detail.
How is the ADX Calculated?
The ADX is part of three indicators called the Directional Movement Index (DMI). Besides the ADX, there is the Plus Directional Indicator (+DI) and the Minus Directional Indicator (-DI). While the ADX only indicates the strength of a trend, +DI and -DI is used to determine the direction of the trend.
To calculate the ADX, you must compare the daily high and low prices for 14 days. The upward and downward movements are then put about each other, and the moving average of this ratio represents the ADX indicator.
The actual calculation is more complicated.
In the beginning, the so-called Up Moves and Down Moves are determined. An Up Move is a distance between the period’s current high and the previous period’s high. A down move is a distance between the low of the last period and the recent low.
Up Move and Down Move are now used to calculate the so-called Directional Movement. There is also a Plus Directional Movement (+DM) and a Minus Directional Movement (-DM). Their calculation is:
- If Up Move is greater than Down Move and Up Move is more significant than zero, then +DM is precisely the value of the Up Move;
- If Down Move is more significant than Up Move and the Down Move is more significant than zero, then -DM is precisely the value of the Down Move.
As you can see, the calculation of the ADX is complex. But what you should take away from it is that the two indicators +DI and -DI, which solely show how strongly a stock price is going up or down, essentially impact the ADX.
The ADX, therefore, does not give any information about the direction of a trend but only about its strength.
The ADX can take values between 0 and 100. However, especially values above 50 are sporadic due to the calculation method of the indicator. With values over 25, you can speak of a strong trend, and should +DI lie above -DI with an ADX of 25 and more, then it is an upward trend, and should -DI lie above +DI, then it is a downward trend.
According to the ADX, a strong trend is present when the ADX value is above 25, while a value below 20 only defines a weak or non-existent trend. Values between 20 and 25 indicate a very ambiguous trend pattern. However, these limits may vary depending on the financial services.
Even though the ADX was not originally designed to display trading signals, a lot can be read from the +DI and -DI lines.
A Bullish DI Crossing is a situation where the ADX is above 25, indicating a trend, and the +DI line crosses the -DI line to the upside.
It is considered a strong signal of a continuing uptrend. In daily trading, it might make sense in such a situation to pull up your stop loss to the current low of the day.
Thus you would have protected your position downwards, and breaking the stop loss would mean an end of the trend. If the movement is over, you are hedged, and if it continues, you make a profit.
The ADX as a Screening Tool
“The Trend is your Friend” is always said among stock traders, and the ADX can help to identify a trend and its strength. However, according to the ADX, an influential trend can also be read in the chart itself.
Accordingly, the ADX provides little added value in such situations. However, it helps to show when the momentum of a trend starts to decrease, and you can replenish your digital assets. Namely, when the peak of the ADX has been reached.