A good combination of indicators to trade will be even better if it’s simple. That’s why some indicators in particular, are capable of multiple information at a glance, are always preferred. ADX is one of those developed by J. Wilder, ADX evaluates the strength of the trend, either bullish or bearish, and at the same time is able to offer to purchase and sell signals.
Easy to read, combine the ADX DI (red line on the graph, representing the upward direction movements) and – DI (downward direction movements, blue line on the graph) and smooths the data with a moving average, showing an average strength of the trend. Due to the use of both DI and – DI, ADX (black line on the graph) does not give some information on the trend, but determines the exact strength. ADX line shows the trend is, its strength readings over 40 indicate a strong trend, and readings under 20. To take a trend from the beginning, you should seek ADX next 25 years. On the contrary, it can mean weakness trend when it starts to lose 40. Readings on the 60 are very few, but they are a great sign of exhaustion in the current trend, which could lead to a turnaround, or at least a strong corrective movement.
The indicator also provides signals: a cross-selling occurs when – DI DI crosses above and the purchase of a sale occurs when crossing DI – DI. Remember always read across the floor and never in the opposite direction. ADX line acts as a filter, as if over 25, says the trend is strong, increasing changes a winning, otherwise, if the ADX is in that area, we are seeing a signal very weak, which gives less chance of success.
False signals often occur as in everything, when the indicator gives a signal immediately opposite, which means they have to leave your current trade and go in the opposite direction, it is a warning to stay on one side of the partner, until we have clearer definitions.
To filter this false signal, a good complement and simple letter is 21 SMA (green): find the price action in relation to the simple moving average: if the price is above the SMA signal purchase, or under the SMA on a sell signal, chances of success increase again. On the opposite side of the MA market is warned that the price is not yet ready to rally.
