ADX stands for Average Directional Movement Index. ADX helps to know the strength of the trend. In many cases, it is ultimate trend indicator. ADX indicator is used with combination of DMI indicator.
This article is all about ADX indicator as well as DMI indicator. You will learn how you can use ADX indicator with DMI when trading. You will learn How ADX works, what value you should use for buying stocks, How DMI works. You will also get an advanced tips on trading using ADX indicator with RSI as well as Bollinger Squeeze Break Out.
There are two types of DMI,- +DMI and -DMI. DMI stands for Directional movement indicator. ADX helps to know the strength of the trend. But DMI helps to know which trend is going upward.
ADX along with +DMI and -DMI helps to measure the price movement smoothly.
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Let’s see how ADX works with +DMI and -DMI?
How ADX indicator works with +DMI and -DMI:
+DMI helps to know when the uptrend is moving up and -DMI helps to know when the downtrend is moving up. ADX only measures the strength of uptrend or downtrend. It helps to know uptrend is strong or downtrend.
Let’s see a graph
Understand ADX indicator with +DMI and -DMI:
let’s understand the graph. Generally most of the software uses blue color for ADX indicator, green color for +DMI and red color for -DMI.
ADX > 20 is strong indication for a trend. Means if ADX value is increasing and it reaches >20, it is good signal of strong trend. Now the trend is defined or measured by +DMI and -DMI. +DMI is used for uptrend and -DMI is used for downtrend.
When +DMI is going upward, means the trend is going up. At that moment if the ADX also moving upward, then it is a strong signal of bullish. We should buy. Now, when the -DMI is going upward, it means the trend is going to down. Similarly, at that moment, if the ADX indicator value is going upward, it means the downtrend is strength. It’s a bearish trend.
Pro Tips on ADX Indicator:
The value of ADX rarely goes to 50 above. Whenever it goes to 40-45 and it takes turn, you should exit. It means if you see that +DMI is going upward as well as the ADX value > 20, you understand the uptrend is going to be strong. But when ADX goes to 40-45 and it turns downward, you must exit at that point.
Conclusion:
Hope you understand, how ADX and DMI works. Now, if you are trader, implement the ADX indicator before trading and make more profit with that. Implementation is the key to success in stock market. If you are gaining knowledge but not implementing, you are not earing. Do it right now. Try to analyze ADX indicator from today. Don’t forget to read, the advanced trader tips on ADX indicator below.
How Advanced Trader Trade By Using ADX Indicator:
Advanced traders use ADX with RSI value as well as Bollinger Squeeze Break Out. When we see +DMI is going upward, ADX value is going above 20 , it means bullish trend. We also follow RSI value. If RSI is going to touch 60 or it cross 60 we buy more quantities as we know RSI > 60 is bullish trend, RSI < 40 is bearish trend, 40<RSI<60 is choppish trend. If we see bollinger squeeze break out also we buy more quantities. If you don’t know about bollinger squeeze break out, you can read my article on bollinger squeeze break out.
Now you also know the advanced tip on ADX and DMI that helps you to earn more and trade like an advanced trader. You can learn more about ADX if you will follow the article given by Investopedia.
Frequently Asked Questions:
Q) What is the full form of ADX?
The full form of ADX is Average Directional Movement Index.
Q) What are the 3 lines in ADX indicator?
The 3 lines in the compose system is ADX indicator which is represented by blue, +DMI which is represented by green and -DMI which is represented by red.
Q) What is best setting for ADX indicator?
The traditional setting for ADX indicator is 14 time periods but traders use the setting as low as 7 and as high as 30.
Q) How do I trade with ADX?
If ADX goes greater than 20, means the trend is strong and if ADX is less than 20, then the trend is weak.
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