The ADX (Average Directional Index) is another indicator to help determine if a
stock is ranging or trending. If you couple this with support/resistance lines (black)
in a range or trend lines (red and blue), then you get an even more accurate picture
of what the ADX is trying to say.
When the ADX is above 30ish, the stock is considered to be trending. It could be
trending up or down but this just states that it is trending. The ADX line is the
green line below. When the blue +DI line is op top (and the ADX is above 30ish),
it means the trend is upward. When the –DI is on top (and the ADX is above 30),
you have a downtrend. This can also be even more accurately confirmed by the trend
When the ADX is below the yellow 30 level (drawn on the chart for emphasis), it
is considered to be in a range. At these times, you could use other ranging indicators
that well be discussing such as the RSI or Bollinger Bands. You can and should always
draw the somewhat horizontal support/resistance (black) lines when in a range.
The ADX is a Welles Wilder style moving average of the Directional Movement Index
(DX). The values range from 0 to 100, but rarely get above 60. To interpret the
ADX, consider a high number to be a strong trend, and a low number, a weak trend.
The ADX was developed by J. Welles Wilder and is described in his 1978 book New
Concepts In Technical Trading Systems.
To recap: The best technical indicators are firstly trend lines/support/resistance/volume.
After that would come the versatility of the MACD. It can be left on the chart at
all times. Use only buy signals in the uptrend and sell signals in the downtrend.
Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
2. MACD – both buy and sell signals
3. Bollinger Bands
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops