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CURRENT MARKET TREND: Up 5/27/16 @ 2090
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Saturday, April 16, 2011

Using the ADX

You can go to stockcharts right now and read about how to use the ADX, but I'm going to tell you how I use the ADX. I believe the adx can be used as a semi-predictive tool rather than the lagging, momo indicator it's intended to be. Of course, you should always use other indicators in conjunction to ensure proper market readings. The adx was specifically developed for use on daily charts for commodity and currency trading (NOT stocks), but I believe in it's value for all trades.

This first chart is the hourly chart:

As you can see, I have a red horizontal line at the 40 mark and a yellow line at the 35 mark. A lot of time the adx will give you a pop over these 2 marks that's tradeable. The first white circle in the chart shows how the ADX and the -DI (red indicator line) both sliced right through the 35 line and above the 40 line. This is showing a very strong trend. Most people wait until the ADX drops back below the 40 line before making a trade, but I don't. When the ADX reaches the 40 line there is usually a correction looming. When this happens, I wait for the ADX line to turn back down to hedge or cut my trade. This trade is represented by the second white circle. On this trade, after the ADX turned down it turned back up and made a higher high while the SP-500 made a new low. I wasn't overly worried because I had counted 5-waves down and there were positive divergences on the -DI indicator as well as other indicators I use. I simply added more long positions at the new bottom.

The triangle that followed didn't give me many clues using the ADX and DMI's so I had to rely on other information to get out of my new long positions. With the DMI's whipsawing I knew it was a correction within a correction so I was prepared to get short again. The ADX this time showed the trend wasn't nearly as strong as it kept turning down at the yellow 35 line. In my experience, if it gets turned down at the 35 line once it usually won't get up to the 40 line. In this case you hedge or cut your position on the first test of the 35 line. Every pop back up to that line is an opportunity to add to your new position or take more profit from your old position. Again, the -DI showed negative divergence on the new low was was a good place to get long.

Now we are long from 1250 and this is where I got into trouble for the first time. The ADX popped up over the 40 line again representing a stronger trend. It started to turn down around 1310 so I sold my longs and added some short positions. This was a mistake since I knew that if the ADX pops over 40 is usually represents a new trend and I got a little ahead of myself. In these cases you want to wait until the ADX pops again and fade that move. I did this at 1328 when the ADX popped back over the 35 line. Now I was holding short positions from 1310 and 1328 and the market started to whipsaw, as did the DMI's. This time I was a little worried because it could've been a consolidation at that level, but I stuck to my guns. The short ended up paying off, but not nearly as well as if I would've waited until the second ADX pop to the 35 line.

On this latest move down I covered those short positions in the 1303-05 area and added longs. You can see the ADX didn't even make it to the 35 line before turning down. This is a weak trend so I knew I needed to get out before the market rose back up. Also noted in the chart is yet another negative divergence on the -DI. It makes it easy to move in and out of positions with the help of these indicators.

What the ADX and DMI's are telling me about this move down from 1340:

On the move down the ADX failed to achieve the 35 mark telling me the downtrend was weak. Sometimes the first portion of a corrective move fails to achieve these numbers.

The move up from 1300 is not raising the ADX at all. The ADX is showing "no trend". Also, the DMI's look ready to whipsaw again. The +DI just crossed over the -DI, and they are about to cross again. This makes the move up look more corrective than impulsive. I would like to wait until the +DI shows me a negative divergence or pushes to new heights before taking a new position. I sold my calls at 1320 and am flat now.

In the next ADX Tutorial I will use a daily chart for longer term trades. I hope you can add the ADX and DMI's to your trading arsenal and make some extra money along the way!


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