Trading Average Directional Index (ADX)

Trading Average Directional Index (ADX)

I started to trade stocks on my own and not only copy people on eToro. What I have noticed is how different tools can help you notice trend changes and give you an opportunity to invest at the right moment.

Well one of the first tools that I learned is ADX. It is used to find out when the prices of a stock (or something else) is trending strongly. I can say that in many cases it is a quite strong indicator. ADX is based on a moving average calculation. I am using the default settings of 14 bars.

On the picture below we can see the stock price falling. If we look below we have a chart with a red, green and purple line.

Red Line (-DMI) and Green Line (+DMI) are the directional movement indicators. The purple line is the ADX.

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.

We can see that in action when the red line takes charge and goes above the green line and the purple line is increases the price goes down. To write this formally “When the -DMI is above the +DMI and the ADX increases, the price of the stock decreases”. This point is the down trend part on the picture below. The inverse is true for the uptrend.

I made a profit of 1.2% here, which is on my initial investment of $100, total of $1.2. It is not much, but since I was aware that the risk is low I was sure that I could make a profit. If you scale this up, by investing $1000 someone could have earned $12 in just a matter of 30 minutes.

This is not financial advice.
I am not a financial advisor.
The intention of the post is just to share my experiences.
eToro Disclaimer : "66% of Retail CFD Accounts Lose Money
Join celsius Network using my referral code 192188355b when signing up and earn $20 in BTC with your first transfer of $200 or more!

comments powered by Disqus