Directional Movement Indicators
The purpose of technical analysis is to identify the price trend and try to participate in the direction of the trend at an early stage and profit from it.
ADX ( Average Directional Index ) along with DI+ & DI- ( Directional Movement Indicators, some denote as DMI ) are technical indicators developed by Welles Wilder in his book ( 1978 ) 'New Concepts in Technical Trading Systems'. If interpreted correctly, ADX, DI+ / DI- can give important hint on the strength of the current trend and warn of a probable reversal.
Welder compares a stock's trading range for one day to the trading range on the previous day to measure trend. Positive directional movement ( DI+) occurs when the high for a day exceeds the high of the previous day. Negative direction movement ( DI-) occurs when the low for a day exceeds the low of the previous day.
Interpretation for DI+ / DI- :
1. When one of the DI is higher than the other ( eg: DI+ is above DI- ), the trend is in the direciton of that DI ( in this case DI+, so the trend is up )
2. When the DI+ and DI- are converging, it suggests the direction of the trend is now sideways . Like in a congestion area, it may break in either direction ( often, the two DIs come to equilibrium and then part in their original direction ). A buy or sell stop should be placed to safe guard your positions.
3. When a DI is reaching an extreme level, it is often associated with a trend being at its maximum and invariably may slow down or perhaps reverse. This is the best time to take profit or exit a position.
The DIs can be used to create the DX ( Direction Index ) and subsequently the ADX. The ADX indicator is valuable in determining when to apply a moving average trend following system or an oscillator leading indicator.
Interpretation for ADX :
1. When the ADX peaks above both the DIs, it often signals a peak in the trend
2. Low levels in the ADX indicates the market is dormant or trendless. A dormant period is usually followed by a dynamic period.
In an article appearing in Futures Magazine, Ashwani Gujral provided general rules for using ADX. His gudielines include the following:
When ADX is rising and at a level:
When ADX is declining and at a level:
Between 45 & 30
- Correction from extreme likely; use patterns and trending indicators
Between 30 & 20
- Consolidation; use Oscillators
Below 20
- Low volatility; very short swings, no trend, use Oscillators
ADX ( Average Directional Index ) along with DI+ & DI- ( Directional Movement Indicators, some denote as DMI ) are technical indicators developed by Welles Wilder in his book ( 1978 ) 'New Concepts in Technical Trading Systems'. If interpreted correctly, ADX, DI+ / DI- can give important hint on the strength of the current trend and warn of a probable reversal.
Welder compares a stock's trading range for one day to the trading range on the previous day to measure trend. Positive directional movement ( DI+) occurs when the high for a day exceeds the high of the previous day. Negative direction movement ( DI-) occurs when the low for a day exceeds the low of the previous day.
Interpretation for DI+ / DI- :
1. When one of the DI is higher than the other ( eg: DI+ is above DI- ), the trend is in the direciton of that DI ( in this case DI+, so the trend is up )
2. When the DI+ and DI- are converging, it suggests the direction of the trend is now sideways . Like in a congestion area, it may break in either direction ( often, the two DIs come to equilibrium and then part in their original direction ). A buy or sell stop should be placed to safe guard your positions.
3. When a DI is reaching an extreme level, it is often associated with a trend being at its maximum and invariably may slow down or perhaps reverse. This is the best time to take profit or exit a position.
The DIs can be used to create the DX ( Direction Index ) and subsequently the ADX. The ADX indicator is valuable in determining when to apply a moving average trend following system or an oscillator leading indicator.
Interpretation for ADX :
1. When the ADX peaks above both the DIs, it often signals a peak in the trend
2. Low levels in the ADX indicates the market is dormant or trendless. A dormant period is usually followed by a dynamic period.
In an article appearing in Futures Magazine, Ashwani Gujral provided general rules for using ADX. His gudielines include the following:
When ADX is rising and at a level:
Between 15 & 25
- Beginning of trending; use trending indicators (eg: moving average)
Between 25 & 45
- Definite trending; use trending indicators (eg: moving average)
45 or above
- Overextended; watch for trend turning point; use price or pattern indicator
- Beginning of trending; use trending indicators (eg: moving average)
Between 25 & 45
- Definite trending; use trending indicators (eg: moving average)
45 or above
- Overextended; watch for trend turning point; use price or pattern indicator
When ADX is declining and at a level:
Between 45 & 30
- Correction from extreme likely; use patterns and trending indicators
Between 30 & 20
- Consolidation; use Oscillators
Below 20
- Low volatility; very short swings, no trend, use Oscillators
Labels: Technical Indicators
posted by Market Wizards @ April 24, 2010
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