Understanding Trading Crypto With Average Directional Index (ADX) Indicator - Final Part
Hello everyone, hope you all are doing good? I'm back with the Part 4 and Final Part of this amazing series, Understanding Trading Crypto With Average Directional Index (ADX) Indicator. If you haven't read the Part 1, Part 2 and Part 3, I strongly suggest you do that by clicking here for Part 1, here for Part 2 and here for Part 3. In today's article we would be looking at what a breakout is, how do you use the ADX filter to determine a valid breakout and what is the difference between using the ADX indicator for scalping and for swing trading?
Photo by Adam Nowakowski on Unsplash
Breakout occurs when the resistance or support of an asset has been broken. Breakout occurs when traders are overbuying or overselling an asset because of the Fear Of Missing Out (FOMO). When price breaks out, if it is a resistance breakout, traders will want to buy more of the assets, so as to make more profits and won't want to miss out on the opportunity. And if it is support breakout, traders will be selling their holdings of an assets, as not to incur losses from the assets, hence, the price continues to fall.
The image above is the $20,000 BTC breakout. The $20,000 breakout is very significant in the world of cryptocurrency. After the break, it continued to increase and increase. That's a good example of breakout.
How do you use the ADX filter to determine a valid breakout?
Using my very own ADX filter, I use when filtering false signals, it becomes quite easy to determine a valid breakout. To determine a valid breakout, you have to detect whenever your ADX line is above 45 ADX value and there is breakout either support breakout or resistance breakout. That will be a valid breakout because after the breakout your ADX Line is above 45 ADX value and rising. And that's how you determine a valid breakout using my very own ADX filter. Take a look at the image below for more understanding.
What is the difference between using the ADX indicator for scalping and for swing trading?
Before I state the difference between using the ADX indicator for scalp trading and swing trading, let me first explain what scalp trading and swing trading means, so you know the reason for the difference when using ADX indicator.
Scalp trading involves the trader making a lot trades in a day and scalp traders are almost always glued to the market, as every bit of information they get, they make use in trading. Whereas Swing trading involves the trader placing a trade for days and sometimes weeks. Swing traders, are hardly glued to the market, once they make their market prediction and place their trade, they wait patiently for trade.
You can clearly see that these two traders have two different strategy. So, when using the ADX indicator, these two different traders will definitely use the ADX indicator differently.
A scalp trader will make use of a shorter period when using the ADX indicator, because a scalp trader, needs signals a lot and shorter period provides a lot of signals, which will be very useful to scalp trader.
On the other hand, a swing trader will make use of a longer period when using the ADX indicator, because a swing trader, doesn't reply on a lot of signals, he/she only relies on a very good signal, which he/she can benefit from when using a longer period.
As for me, I prefer scalp trading, because I'm not so patient. I can't place a trade and wait several days, it is almost impossible for me. I like to know if my day was profitable or not. And since I understand how to filter false signals, scalping trading when using ADX indicator, just got super simple for me, as I will perfectly wait for the right set up before I place my trade. And my set up for buy signals, is that the ADX line must be around 40 - 50 and rising and the DI+ must be above DI-. I can patiently wait for this set up all day and once I see it, I place my trade and make some good profit for the day. Many people may choose Swing trading, because they are worried about the many false signals associated with Scalp trading. They choose Swing trading because they don't know how to filter false signals, but I can adequately filter false signals and that's why scalp trading is my choice.
I hope you all found the article interesting and exciting. Do well to share your thoughts about the article in the comment section below. Thanks.
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