Known for long ago as a trending indicator that can help traders take better chances of profiting from a trend, Average Directional Index (ADX) is underutilized by many traders since this indicator usually comes too late in a game.
This is also because its traditional readings have significant lags, thus often preventing the traders from entering on important price movements. Lucky for us, though, there is an answer that modifies the approach used in ADX. It allows the trading platform to easily and effectively identify the initiation of strong trends.
How Does the ADX Indicator Work?
This indicator is a technical analysis tool developed by J. Welles Wilder to determine a trend’s strength, which could either be advancing or declining. The ADX itself is represented by a straight black line that oscillates between 0 and 100. Readings above 25 represent the presence of a strong trend, while readings below suggest the presence of a weak trend. The primary advantage of the ADX is that it enables traders to determine whether a strong move is occurring so that they are better equipped to catch large market swings.
This, however, does not mean that the ADX lacks weak points. The highest weakness of the ADX is its tendency to lag. This is primarily because of the use of moving averages in coming up with the values. It makes the users wait for the ADX line to bounce above the 25 mark, only to find out that most of the price movement has already taken place. This simply means that if used as a trading tool, such will lower risk-reward ratios and, hence, reduce the gain that one will get from a trade.
Tuning the ADX Strategy
We’ll add some fine-tuning to the ADX indicator so that the entry is maximized, allowing for an early entry yet still being able to catch up strongly in terms of trend. First, we’ll drop the threshold to 20 from a threshold level of 25. This will allow traders to get an earlier signal of trend strength with lower threshold signals.
Applying Directional Movement Index (DMI)
Another thing we’ll do, in addition to changing the ADX threshold, is add the Directional Movement Index lines: there are two parts to them, DMI+ (green line), and DMI- (red line). These lines will give us a directional signal; whereas the ADX does not.
The approach is simple:
- Watch for the ADX line to go above 20. This could be the start of a developing trend.
- You want to make sure that your DMI+ is going up and your DMI- is going down. That means the market is not just trending, but you can see which way it’s gonna go.
- Once this is confirmed, then you can buy that market with confidence and ride the big move before the ADX line crosses above 25. This way you take advantage of the majority of the move, so you get the best from your trade.
Timing Your Entry
While the ADX and DMI report is great to have, it still leaves timing a trader’s key challenge for accessing the markets successfully. All this is about to be largely helped by the Market Timing Indicator. The indicator now offers a much-needed entry guide to the savvy trader, enabling informed decisions according to market availability rather than drawing conclusions from lagging indicators.
The Market Timing Indicator is set to detect the right moment when you should enter the market to take advantage of trading opportunities. Combined with the adjusted ADX strategy, you may enter at any point where the trends are getting momentum.
Conclusion
To summarize, the modified ADX strategy can be considered a strong approach for capturing significant moves in the market. When considering lowering the ADX threshold to 20 and using DMI lines, this approach is helpful to catch trends much earlier and, most importantly, with much higher accuracy. In such cases, the Market Timing Indicator enables the use of higher precision in entry, further maximizing traders’ profitability.
With this ADX strategy being adopted, it can be possible to take the traditional weaknesses of the ADX and turn them into strengths when capturing big moves. Sure enough, with these strategies, whether you’re a beginner or an old-timer trader, it’ll make it easy to ride through the confusing flow and adventures in the markets.
For a much more in-depth look at the modified ADX strategy and most effective applications of the Market Timing Indicator, sign up for this comprehensive tutorial at indicatorwebinar.com. To pre-record one webinar, each issued topic is explored in depth with trading strategies so that traders can make smart, profitable decisions within an ever-accelerating trading world.
