ADX Trading Strategy | Understanding ADX Indicator

ADX stands for Average Directional Index, and it primarily measures the strength of a trending market. It works on a moving average that tracks the range expansion of the price of an asset in a given period. We will dive deeper into this article to understand how it works and benefits cryptocurrency traders from a swing, intraday, and investment perspective. You can then test it on paper trading with an edge on it.

ADX Indicator And What Is It About

It is not a momentum oscillator but uses price impulse as data. It is not a volatility indicator but can provide insights into buyers' and sellers' activity when it works with the Directional Movement Indicator (DMI).

It is ultimately a trend trading indicator that gauges the strength of the price action regardless of the market direction.

How does ADX work?

The moving average that ADX plots is a 14-period that moves between values from 0 to 100.

DMI And ADX

By itself solely, ADX is a single line oscillating between the values expressed previously. However, a typical use comes with the DMI. In that case, traders can have a more advanced approach to measuring trend strength.

DMI and ADX can be up to 4 lines:

• +DI: Buyers.
• -DI: Sellers.
• DX: Directional Index.
• ADX: Average Directional Index.

Typically, traders use three of them: +DI, -DI, and DX. This way, they measure the demand and supply alongside their strength:

• When the DI is positive, buyers are in control.
• When the DI is negative, sellers are in control.
• The DX gauges their distance: the more distance there is within the +DX and -DX, the more strength there is on either the buyers' or sellers' side.

It can seem complex, but it is not. If you already understand the MADC, the DX line is like the histogram that increases and decreases when the MACD and signal lines separate or narrow.

Finally, the ADX indicates the average of all the three.

ADX For Crypto Markets

Crypto markets are known and attractive for their intrinsic volatility and sharp moves. From a very long-term perspective, large-cap crypto coins like BTC and ETH have been trending upward ever. Farther from the volatility conditions, ADX could have assisted investors in unveiling the strength of those primary coins trending markets.

However, crypto traders should be aware of the actual application of ADX and not miss the central concept: measuring the likelihood for a market to remain trending. In this sense, trying to get a signal for a short-term buying or selling approach could not be the most accurate implementation.

Likewise, attempting to conduct a chart reading based on a directional move is the wrong application, and it is so for crypto assets, whose underlying speculative nature makes it hard for the market to find a clear direction and start trending.

To understand ADX in this context, we should study each trading style.

ADX For Scalping

ADX is naturally a lagging indicator, while scalping is a high-frequency and fast-execution trading style. From these two definitions, we can already intuit an answer: it is not precisely the best indicator for scalping.

However, as trading is an all-possible activity, surely there could be creative ways to use it from a very short-term standpoint along with other indicators.

For instance, traders could use it in a short time frame as a confirmation tool for timing an entry point by measuring the strength of a particular price zone or a specific candle at an exact moment during a trend.

ADX For Day Trading

ADX for day trading can help traders measure the strength of a day's trend. If an asset has been on trend for several days or a notable prolonged period, day traders can use it to:

• Analyze the trend strength during previous days.
• Assess a potential reversal or continuation of the trend.
• Detect false or real breakouts.

Breakouts are very common during intra-day sessions. These price movements generally occur at the session opening, range expansions, or during trend patterns like flags, pennants, and triangles. ADX can help traders measure each breakout.

Furthermore, during intraday sessions after the first hours when the price makes the primary moves, it tends to move sideways, which means in a range, most of all, before a day's reversal move, trend continuation, or, as typically does, before the afternoon sessions when end-of-day movements take place.

ADX For Swing Trading

For swing trading, ADX represents more than an edge; we could say it is the more accurate application. Since ADX is a trend trading indicator and the most profitable trending markets last from a middle-term to long-term standpoint, we can infer how swing traders can benefit.

When swing traders enter a position, they no longer care for momentum or direction as much as for how long the current trend will last. For a trend to prolong in time, it needs strength.

A strengthening trend indicates a healthy supply if it is going down or demand if it is going up, and that is what a swing trader needs to maintain a position for days or weeks.

So, swing traders can use ADX such as follows:

• To measure the strength of a current trend and how costly an entry point is in the middle, obtaining insights about its weakening price zones.
• To measure how the trend gains strength after a turning point to decide if it is worth executing a reversal trade, keeping an already position going, or getting out of the market to avoid a loss.

ADX For Portfolio Investments

Long-term investors build portfolios integrating multiple assets from different industries. This type of investment benefits solely from the following:

• Trend trending markets when assets go up and suffer when markets crash.
• On the other hand, portfolio managers reallocate or reduce capital if an asset remains without a clear direction for an extended period.

Each asset may have its characteristic volatility and momentum. As with swing traders, the most essential thing for investors is the probability that a trending asset will continue over time.

As far as we know, ADX accomplishes that task. Indeed, stock investors are well-known users of this indicator while they manage their stock portfolios.

Conclusion

ADX is a straight-trend trading indicator with powerful and versatile applications. Traders can use it for different styles while maintaining its central concept. Also, they can implement it in combination with DMI for a more advanced approach.

In Altrady, crypto traders can benefit by using the DMI and ADX. Sign up for a free trial account today, and do not miss the opportunity to measure the strength of crypto assets.