The ADX indicator in cryptocurrency: how to use it to determine the strength of a trendADX was invented by Wells Wilder back in 1978.
The principle of operation of the indicator is described in more detail in the author's book. Translated from English, ADX is an index of the average direction of movement. The oscillator is quite complex and requires detailed study, but it is effective. Due to the difficulties of studying and analyzing it, it has not become as popular as, for example, RSI. The indicator is great for experienced traders, but it can also be used by beginners.Experts say that it is most profitable to make money on the market during periods of strong trends.
With the help of ADX, you will be able to analyze and determine the presence of trends in the market in a given period of time. The indicator will not be able to indicate the direction of the trend, it only shows its strength and presence in general. The author of the indicator believes that for successful transactions, a trader must determine the trend and trends in the market.Formation of the ADX indicator
ADX appeared due to the merger of two other indicators: +Dl is the index of positive movement and -Dl is the index of negative movement.
On the graph, the indices are represented as dotted lines. A positive index measures upward fluctuations, and a negative index measures downward fluctuations. Wells suggests choosing a period equal to 14, since he used it. The figure below shows the settings recommended by the author.The indicator, like the others, assumes a bullish and bearish trend.
With a bullish trend, the price peak should be higher than the previous day. In a bearish trend, the price should be lower than the previous one. The difference between the highs of today and the previous day is expressed in the indicator +Dl, and the lows in -Dl. It happens that there are no jumps in the market, then the movement is ignored.The ADX indicator is derived from +Dl and -Dl, so it can measure the strength of trends.
If you observe a high ADX value, then the market direction will also be strong. Often the indicator lines reach low levels, then the movement loses its direction. ADX can have values from 0 to 100. If the ADX reaches 20 and below, then this is a very weak trend, if the indicator reaches 40-60, this is a strong trend. It is important to remember that reaching the 40 mark, the trend does not become bullish, it is just very strong, it is important not to confuse such moments at the study stage.Ways to use the ADX indicator
The user must follow the direction of the lines, with the right tactics, the purchase will be successful and profitable.
If you see on the chart that +Dl is crossing from the bottom up to the -Dl line, then this is a buy signal. It is important to distinguish the sideways movement*, which can confuse the trader. Lateral movements also make intersections, but their signals are false.As an example, we can consider the EUR/USD currency.
During the period of sharp growth, the indicator reached 61, then a sideways trend began. Then the indicator values dropped to 20. A more visual example can be seen in the figure below:Features and disadvantages of ADX
The ADX indicator, like all the others, has its pros and cons.
The intersection of the lines does not always give a plausible signal to buy. Even the author himself notes that it is necessary to wait and observe. The indicator is quite complex and difficult, for a qualitative study it will take a lot to observe and analyze.An important advantage of the indicator is a visible slowdown of the trend, during this period a reversal may begin.
You will be able to determine when the trend forces are falling and increasing. The indicator quickly determines the moment of reversal and will give the trader a signal.