The Average Directional Index ADX is the perfect tool to determine the strength of the trend. Every time traders have to know if the price is trending or not.
Open a trend follower trade in the trend direction is a good idea, but only if the trend exists and is strong.
The standard length for the ADX Formula calculation is 14 periods.
ADX is calculated with a moving average of price range expansion over a given period and is plotted as a single line.
The ADX Indicator
Many platforms have the ADX Indicator preinstalled. TradeStation platform has an ADX that changes color when it is over 20 levels. Is it enough? Probably not, and we’ll add many features.
The first change that we can make is to amply the levels to calculate the trend strongly.
We create four levels:
- 0 to 20 = Weak Trend
- 20 to 40 = Strong Trend
- 40 to 60 = Very Strong Trend
- 60 to 100 = Extreme Trend
Our Average Directional Index Indicator now changes four-color and is complete.
What is missing in this indicator? Probably the slope of the Average Directional Index. For example, the ADX has a value of 50 but it decreasing rapidly, the trend is robust? You have to consider that an automatic trading system can’t observe the chart like you, but needs as much information as possible.
The ADX Slope Indicator
We can add another control to our indicator: the ADX Slope Indicator.
We created many free Slope Indicators, for example, the Moving Average Slope Indicator.
The slope direction is straightforward to calculate; you have to compare the last ADX value with the two precedent. When ADX is increasing the color became green and red when it is decreasing. When there isn’t the direction, the color became Cyan and Blue.
If we would like to use the ADX Slope Indicator with the precedent Average Directional Index, we have to transform this indicator in a histogram. We can use both indicators, and with the histogram, we can anticipate the ADX movement.
If you want to download all ADX Indicators for free, choose your platform:
Do you need this indicator for MetaTrader? Write to us!
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You can learn more about this indicator, reading these resources: