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ADX: The Trend Strength Indicator

ADX indicator is at 44 and climbing on your chart and telling us the NSAV pps trend is strong.

http://www.investopedia.com/articles/trading/07/adx-trend-indicator.asp

Trading in the direction of a strong trend reduces risk and increases profit potential. The average directional index (ADX) is used to determine when price is trending strongly. In many cases, it is the ultimate trend indicator. After all, the trend may be your friend, but it sure helps to know who your friends are. In this article in this article, we'll examine the value of ADX as a trend strength indicator.

Introduction to ADX
ADX is used to quantify trend strength. ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although other time periods can be used. ADX can be used on any trading vehicle such as stocks, mutual funds, exchange-traded funds and futures. (For background reading, see Exploring Oscillators and Indicators: Average Directional Index and Discerning Movement With The Average Directional Index - ADX.)

ADX is plotted as a single line with values ranging from a low of zero to a high of 100. ADXis non-directional; it registers trend strength whether price is trending up or down. The indicator is usually plotted in the same window as the two directional movement indicator (DMI) lines, from which ADX is derived (Figure 1).

For the remainder of this article, ADX will be shown separately on the charts for educational purposes.


Source: TDAmeritrade Strategy Desk
Figure 1: ADX is nondirectional and quantifies trend strength by rising in both uptrends and downtrends.

When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend.

Figure 1 is an example of an uptrend reversing to a downtrend. Notice how ADX rose during the uptrend, when +DMI was above -DMI. When price reversed, the -DMI crossed above the +DMI, and ADX rose again to measure the strength of the uptrend.

Quantifying Trend Strength
ADX values help traders to identify the strongest and most profitable trends to trade. The values are also important for distinguishing between trending and non-trending conditions.

Many traders will use ADX readings above 25 to suggest that the trend's strength is strong enough for trend trading strategies.Conversely, when ADX is below 25, many will avoid trend trading strategies.

ADX Value Trend Strength
0-25 Absent or Weak Trend
25-50 Strong Trend
50-75 Very Strong Trend
75-100 Extremely Strong Trend

Read more: http://www.investopedia.com/articles/trading/07/adx-trend-indicator.asp#ixzz3ZspHfEiG

Go NSAV!