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The Secret To Using ADX Indicator Trading Setups Review

Post on: 16 Март, 2015 No Comment

You can sum up the secret to using ADX indicator in a single word: SLOPE .

Most traders learn that ADX is a powerful system that tells you if the market is trending. The typical interpretation is that if ADX is above 25, the market is trending. If ADX is below 25, the market is meandering without direction. (You can also use ADX as a low-risk day trading trigger with the 2-period ADX .)

While the value of ADX is important, the slope of ADX is also a valuable tool. After all, for ADX to move above 25, it must first tilt up. Hence, the ADX slope will be positive even before it crosses 25. This gives us an early signal to a trending market. Similarly, when ADX slopes down, the market might be entering a trading range.

Essentially, paying attention to ADX slope compensates for the lagging nature of the ADX indicator.

Interpreting ADX Slope

Rising ADX slope means trending market

This is daily chart of SPY. The lower panel shows the ADX indicator. The background color of the chart is green when ADX is rising, and turns red when ADX is falling.

Looking at the ADX slope gave earlier signals to a trending market. The ADX slope turned positive at two points that hinted at a trending market.

If we had waited for ADX to rise above 25 to confirm the trend, the signal would come almost a month after the first hint from ADX slope.

Of course, the ADX slope is no Holy Grail. ADX slope changes directions frequently and is more prone to giving false signals. However, if you pay attention to the price action together with the slope of ADX, you can cut false signals reliably.

This is how you do it. When prices are moving in one direction, the slope of ADX should stay positive. Look at the down swing near left hand side of the chart. During that down swing, prices are clearly falling, but ADX slope fluctuated up and down. So we ignore those signals.

Compare this to the first hint of the up trend that we pointed out. Prices have risen before the change in ADX slope. Prices continued to rise with ADX sloping up for consecutive bars. This is a more reliable sign that a trend is in place.

Falling ADX points to Ranging Market

Again, the ADX slope gave a signal of a ranging market almost 3 weeks earlier than traditional ADX analysis.

Once we confirm that the market is ranging, be doubtful of positive ADX slope signals as failed breakouts are common. Unless the positive ADX slope comes with a strong breakout from the trading range, assume that the breakout will fail.

Bollinger Bands are useful for estimating the support and resistance levels within the range. The Gimmee bar trading strategy uses Bollinger Bands to trade ranging markets. Employing the ADX slope to scan for sideways market before looking for Gimmee bars is a good idea for swing traders looking for trade opportunities.

ADX Slope is not a well-kept secret

Okay, I must confess. Using ADX slope is not that much of a secret. (In fact, please be doubtful of any trading secrets, especially those that cost you $3,000 each.)

Several advanced users of ADX has discussed using the ADX slope for trading in forums and trading books. I shall redeem myself by listing them here for you.