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A New Look at the
Average Directional Index(ADX)
A webcast presentation for the Market Technicians Association
Presented by Chuck LeBeauDirector of Analytics www.SmartStops.net
October, 2010
Introducing the
Average Directional Index (ADX)
The ADX shows us the
strength of trends by measuring the amount of
Directional Movement
Note: The ADX is sometimes called the Directional Movement Index
or “DMI”
The Key to Using ADX
• A rising ADX shows that the
strength of the trend is increasing
(more directional)
• A falling ADX shows that the trend
is weakening (less directional).
ADX Components
• The ADX is made up of the Plus DI and the Minus DI
• The Plus DI shows the amount of Positive (upward) directional movement.
• The Minus DI shows the amount of negative (downward) directional movement
Plus DI
Minus DI
No DI
Plus and Minus DI measure
Directional Movement
Market in balance
ADX declines
Market out of balance
ADX rises
Applying the ADX
• The direction of the ADX is the key!• A rising ADX tells us the trend is strengthening
and we should follow the trend.• A falling ADX tells us the trend is weakening and
we should trade counter-trend.
• Important: The absolute level of the ADX is not predictive. A low level indicates that the market was sideways. A high level indicates the market was trending. Only the current slope or direction of the ADX tells us what is most important : what is happening NOW!
The ADX can also be used forselling short
• Minus DI must be above Plus DI
• A low ADX level is not important
Practical applications of ADX for entries
• What to enter: To identify the strongest marketslook for markets where the ADX is rising.
• How to enter: The direction and slope of the ADX also tell us how to enter.
• If the ADX is rising rapidly, enter immediately “at the market” before you miss a big move.
• If the ADX is rising slowly or falling, it is OK to wait for cheaper prices and do some bargain hunting.
ADX Tops and Bottoms Pattern
• The ADX can sometimes be used to detect and trade major “V” shaped tops and bottoms.
• Setup: The ADX line must be higher than either the Plus DI or Minus DI. The high ADX indicates that a strong trend has been in place and may reverse soon. Best “V” signals will occur when the ADX is above 35.
• Trigger: The fastest entry signal is when the Parabolic point is crossed.
• Confirmation: DMI crossings will confirm the reversal.
Buy
Sell
ADX signals a “V” bottom
followed by a “V” top
ADX highest
ADX highest
ADX highest
Buy when Parabolic
is crossed.
ADX “V” bottom pattern
Practical applications of ADX for exits
• When ADX is rising - Be patient and look for big profits.
• When ADX is falling - Be cautious and take profits quickly before they get away.
ADX Summary
• Use slope of Aeasure and compare strength of trends
• Use ADX to choose correct trending/non-trending strategy
• Know the correct entry method – enter now or be patient and enter later
• Recognize important “V” tops and bottoms
• Know when to quickly take small profits and when to patiently hold for large profits
ADX Summary
• Use slope of ADX to measure and compare strength of trends
• Use slope of ADX to choose correct strategy (trending or non-trending) for each market
• Know the correct entry method – enter immediately or be patient and enter later
• Use unusually high ADX to recognize important “V” tops and bottoms
• Know when to quickly take small profits and when to patiently hold for large profits
Be sure to visit Chuck LeBeau’s Web Siteswww.traderclub.com or www.SmartStops.net
To learn more about ADX you can order Chuck LeBeau’s Workshop DVD package
“How to Design, Test, Evaluate and Implement Profitable Trading Systems”
Includes - 2 DVDs with more than 5 hours of instructionIncludes - helpful Workshop WorkbookIncludes - ADX based “High Beta” stock trading system
All for only $250.00 - credit cards or PayPal welcome
Order by phone: (928) 639-1337 or [email protected] and ask me to bill you via PayPal
Questions are welcome
For questions or to receive a free copy of this PowerPoint presentation
send an e-mail [email protected]