Technical Analysis Strategies: Digging Deep For Profit In New York

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Technical Analysis Strategies: Digging Deep For Profit In New York – Trading in the direction of a strong trend reduces risk and increases profit potential. The Average Directional Index (ADX) is used to determine if the price is in a strong trend. In many cases, this is the last indicator of the trend. After all, the trend may be your friend, but it helps to know who your friends are. In this article, we will look at the ADX value as an indicator of trend strength.

ADX is used to quantify trend strength. ADX calculations are based on the moving average of the price range expansion over a period of time. The default setting is 14 bars, but other time periods can be used. ADX can be used in any trading instrument such as stocks, mutual funds, exchange-traded funds and futures.

Technical Analysis Strategies: Digging Deep For Profit In New York

Technical Analysis Strategies: Digging Deep For Profit In New York

The ADX is plotted as a single line with values ​​ranging from zero to 100. ADX is not directional; it registers trend strength regardless of whether the price is trending up or down. The indicator is usually drawn in the same window as the Dual Directional Movement Indicator (DMI) line from which the ADX is derived (shown below).

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The ADX is non-directional and determines the strength of the trend by increasing in both uptrends and downtrends. Photo by Sabrina Jiang © 2020

When +DMI is higher than -DMI, prices are bullish, and ADX measures the strength of an uptrend. When -DMI is higher than +DMI, prices are down, and ADX measures the strength of the downtrend. The chart above is an example of an uptrend versus a downtrend. +DMI – When the DMI is high, notice how the ADX rises during an uptrend. When price reversed -DMI + crossed above DMI, and ADX rose again to measure the strength of the downtrend.

ADX values ​​help traders identify the strongest and most profitable trading trends. Values ​​are also important for distinguishing between trending and non-trending situations. Many traders use ADX indicators above 25 to indicate that the trend is strong enough for trend-trading strategies. Conversely, when the ADX is below 25, most avoid trend-trading strategies.

A low ADX is usually a sign of accumulation or distribution. When the ADX is below 25 for more than 30 bars, the price enters range conditions and it is often easier to spot price patterns. The price then moves up and down between resistance and support to find sell and buy percentages respectively. From low ADX conditions, the price will eventually trend. Below, the price is moving from a price channel with a low ADX to an uptrend with a strong ADX.

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When the ADX is below 25, the price enters a range. When the ADX rises above 25, the price is trending. Photo by Sabrina Jiang © 2020

The direction of the ADX line is important for reading trend strength. When the ADX line rises, the trend strength increases and the price moves in the direction of the trend. When the line goes down, the trend strength decreases and the price enters a period of recovery or consolidation.

Low ADX periods lead to price patterns. This chart shows the formation of a cup and handle that starts an uptrend when the ADX rises above 25. Photo by Sabrina Jiang © 2020

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A common misconception is that a falling ADX line means the trend is reversing. A falling ADX line only means that the trend strength is weakening, but it usually does not mean that the trend is reversing unless there is a price peak. When the ADX is above 25, it is better to think of the falling ADX line as normal

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When the ADX is below 25, the trend is weak. When the ADX is above 25 and rising, the trend is strong. When the ADX is above 25 and falling, the trend is less strong. Photo by Sabrina Jiang © 2020

A series of ADX peaks is a visual representation of the overall trend momentum. The ADX clearly shows whether the trend has gained or lost momentum. Momentum is the speed of the price. A series of high ADX peaks means that the momentum of the trend is increasing. A series of lower ADX peaks means that the trend momentum is down. Any ADX peak above 25 is considered strong, even if it is a lower peak. In an uptrend, price can still go higher as the ADX momentum declines, as the overbid gets eaten up as the trend rises (shown below).

ADX peaks above 25, but declines. The trend is losing momentum, but the upward trend remains unchanged. Photo by Sabrina Jiang © 2020

Knowing when the momentum of a trend is building allows the trader to take profits instead of exiting before the trend ends. However, a series of lower ADX peaks is a warning for price monitoring and risk management. The best trading decisions are made based on objective signals, not emotion.

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ADX can also show momentum divergence. When the price is higher and the ADX is moving lower, there is a negative divergence or disconfirmation. In general, a divergence is not a reversal signal, but rather a warning that the momentum of the trend is changing. It may be appropriate to strengthen the stop-loss regime or take a partial profit.

Anytime the nature of a trend changes, it’s time to assess and/or manage risk. Divergence can lead to a trend continuation, consolidation, correction or reversal (below).

The price is making a higher high and the ADX is making a lower low. In this case, a negative divergence led to a trend reversal. Photo by Sabrina Jiang © 2020

Technical Analysis Strategies: Digging Deep For Profit In New York

Price is the most important signal on this chart. First read the price, then read the ADX in the context of what the price is doing. When any indicator is used, it must add something that price alone cannot easily tell us. For example, the best trends rise above price range consolidation periods. A range break occurs when there is a price disagreement between buyers and sellers, which balances supply and demand. It is the difference between supply and demand that creates price momentum.

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Interruptions are not difficult to spot, but they often fail to progress or become traps. However, the ADX signals that breakouts are valid by showing when the ADX is strong enough for the price to trend after the breakout. When the ADX rises from below 25 to 25, the price is strong enough to continue in the direction of the breakout.

Conversely, when price moves from trend to range conditions, it is often hard to see. The ADX indicates that the trend has weakened and is entering a period of extensive consolidation. Range conditions occur when the ADX falls from above 25 to below 25. In the range, the trend is indirect and there is general price agreement between buyers and sellers. The ADX turns below 25 until the balance of supply and demand reverses again.

ADX provides excellent strategy signals when combined with price. First, use ADX to determine whether prices are trending or untrending, and then choose an appropriate trading strategy for the condition. In the case of a trend, entries are made on reversals and taken in the direction of the trend. Trend-trading strategies are not appropriate in case of range. However, trades can be made on support (long) and resistance (short) reversals.

The best profits come from trading the strongest trends and avoiding range conditions. ADX not only identifies trending conditions, but also helps the trader find the strongest trading trends. Being able to quantify the strength of a trend is a major advantage for traders. The ADX also defines range conditions, so the trader is not stuck trading trend in sideways price action. In addition, it indicates that the price has broken out of a range with enough strength to use trend-trading strategies. The ADX also alerts the trader to changes in trend momentum, so risk management can be addressed. If you want the trend to be your friend, you better not let the ADX become a stranger.

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Those interested in learning more about ADX and other financial topics may want to consider enrolling in one of the best technical analysis courses currently available.

Requires writers to use primary sources to support their work. These include white papers, government data, original reporting and interviews with industry experts. We also cite original research from other reputable publications where appropriate. You can learn more about the standards we adhere to in producing accurate, unbiased content in our editorial policy.

The offers in this table are from compensating companies. This compensation can affect how and where listings appear. does not cover all offers available in the market. Technical analysis is the study of historical market data, including price and volume. Using insights from market psychology, behavioral economics, and quantitative analysis, technical analysts aim to use past performance to predict future market behavior. The two most common types of technical analysis are chart patterns and technical (statistical) indicators.

Technical Analysis Strategies: Digging Deep For Profit In New York

Technical analysis is a general term for various strategies related to the interpretation of price action in a stock. Most technical analysis focuses on determining whether the current trend will continue, and if not, when it will change. Some technical experts swear by trend lines, others use candlestick formations, and others prefer

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