Understanding Trading Crypto With Average Directional Index (ADX) Indicator - Part 3
Hello everyone, hope you all are doing good? I'm back with the Part 3 of this amazing series, Understanding Trading Crypto With Average Directional Index (ADX) Indicator. If you haven't read the Part 1 and Part 2, I strongly suggest you do that by clicking here for Part 1 and here for Part 2. In today's article we would be looking at how can we take advantage of this indicator, the different trends detected using the ADX indicator and how do we filter out the false signals.
We can make use of only ADX indicator to trade because we can determine the strength of a trend using this amazing indicator. It is not a must that we have to add DI+ and DI- indicators before we can trade with ADX, we can even use other indicators with ADX indicator to trade even better. ADX and DI+ and DI- indicators, works well together, but they can be used independently. DI+ and DI- indicators just makes ADX indicator clearer for traders to understand.
How can we take advantage of this indicator?
We can use this indicator to how advantage, in two ways, which are;
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Determination of Trend Strength
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Determination of a Bullish or Bearish Trend.
- Determination of Trend Strength: The ADX Line is a very useful tool, as it helps to indicate the strength of the trend and it does not care if it is bearish or bullish trend. So, if you study the ADX Line very well, you will notice that whenever it is beyond 25 value, it is a strong trend whether it is bearish or bullish. Traders mistake the ADX Line when it goes up, and think it is Bullish indication. That's wrong because it could be bearish market, but it is just indicating that the bearish market trend is quite strong. Look at this image below for more understanding.
As you can see from the chart above, the price is falling and the ADX Line is rising and going higher, indicating that it will be strong bearish market. Traders can use that signal to their advantage, by entering Sell Entry when they notice a continuous rise in the ADX Line.
- Determination of Bullish or Bearish Trend: We can add the DI+ and DI- to determine if the market will be bearish or bullish market. Whenever DI+ is above DI-, the market is bullish. If the ADX line is rising while DI+ is above DI-, that's a good signal to buy. Also, if DI+ is below DI-, the market is bearish. If the ADX line is rising while DI+ is below DI-, that's a good signal to sell. Let's take a look at an example below.
You can see from the chart, that when DI+ was above DI- and the ADX line was rising, it was a clear bullish market trend, and a signal for traders to buy. Also, if ADX line is falling, it doesn't indicate a change in trend, it just means, that trend isn't strong and it is consolidating.
Different trends detected using the ADX Indicator
There are mainly 4 different trends which can be detected by using the ADX indicator. Different trends are mainly determined by the ADX value which ranges between 0 - 100. Below are the 4 different trends, which are;
- No Trend or Weak Trend
- Strong Trend
- Very Strong Trend
- Extremely Strong Trend
- No Trend Or Weak Trend: This trend is detected when the ADX line is between 0 - 25. When the ADX Line is between this range, there's usually no trend or a weak trend, as the price is consolidating. Traders should relax and wait out this trend. Below is an example of a No Trend or Weak Trend.
- Strong Trend: This trend is detected when the ADX line is between 25 - 50. This is the most common trend detected by traders. This indicates that market is having strong trend and traders, should be ready to place their Buy or Sell trade. Below is an example of a Strong Trend.
- Very Strong Trend This trend is detected when the ADX line is between 50 - 75. It is not a common trend detected by traders. This indicates a very strong bullish or bearish market trend. If you see this kind trend, place in your buy or sell immediately. Below is an example of a Very Strong Trend.
- Extremely Strong Trend: This trend is detected when the ADX line is between 75 - 100. This is rarest trend, very hard to come by. This trend indicates a major break out from either a support or resistance. You place a huge fund on your trade when you see this kind of trend, because it is rare and very uncommon, so, it is usually a solid signal for traders to place a huge Buy or Sell trades. Below is an example of an Extremely Strong Trend.
How do you filter out the false signals?
After using the ADX indicator for over 3 days, I can confidently say the best way to filter false signals is by confirming your DI+ and DI- indicators with your ADX indicator.
Changing your DI length and ADX Smoothing for longer period, is not a solution, as you will miss out on so many good signals. As it may be too late before you see the signal.
But whenever you confirm your DI+ and DI- indicators with your ADX indicator, you can easily filter false signals, and get really good signals. If you DI+ and DI- indicator is pointing towards a bullish trend or bearish, use your ADX to confirm if such trend is strong before entering into your trade.
Ensure that your ADX Line is above 45 ADX value before you use the trend signal of DI+ and DI- indicator to enter a trade. By waiting for a high ADX value, you are easily filtering false signals. I feel this is the best approach to filtering false signals when using the ADX indicator.
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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