How to Trade / Invest with ADX/DMI
ADX, +DMI & -DMI
Average Directional Movement Index (ADX) was
developed by J. Welles Wilder and presented in his
book, New Concepts in Technical Trading Systems
(1978).
ADX is derived from two indicators known as
Positive Directional Movement Indicator (+DMI)
&
Negative Directional Movement Indicator (-DMI).
ADX, +DMI & -DMI
What is ADX ? (with DMI)
ADX is an indicator that measures trend strength
shows trend direction.
ADX measures the difference between the +DMI &
-DMI.
ADX/DMI is a BANDED INDICATOR, value
range between 0-100.
ADX tells us whether the bulls or the bears are
in control.
Advantage of using ADX
ADX Helps to distinguish between TRENDING &
NON-TRENDING Markets.
ADX allows traders to choose only the strongest
trends to trade.
ADX Works on all timeframes and segments.
ADX Can be combined with other indicators.
Directional Movement (DM)
DM is the largest part of today’s range that is
outside of yesterday’s range.
When the largest part of today’s range is above
yesterday’s range, get positive Directional
Movement (+DM).
When the largest part of today’s range is below
yesterday’s range, get negative Directional
Movement (-DM).
Directional Movement (DM)
+DM -DM +DM &-DM NO DM
DMI to determine TREND
DIRECTION
DMI lines separate/diverge :
Trend strengthens, ADX rises.
DMI lines come together/converge :
Trend weakens, ADX falls.
DMI Confirms trend direction and
Confirms price entry/exit.
ADX DMI Parameters
As Suggested by Dr. Schaap :
DMI - 13
ADX - 8
Use ADX/DMI value readings above 25.
Trend & DMI Lines
ADX/DMI Value Reading
Dominant DMI & Breakouts
DMI on top is known as Dominant DMI.
(Higher High above the same DMI or opposite
DMI),
DMI & PRICE Breakout/Breakdown.
o A valid breakout requires a new high in price and
a new high in +DMI (at the same time +DMI > 25)
o A valid breakdown requires a new low in price and
a new high in –DMI (at the same time -DMI > 25)
Exclusive Feature of DMI
If Both DMI are below 25 :
No Dominant Trend Direction.
Consider Trend is Range-Bound.
Either DMI moves above 25 :
Beginning of a TREND.
Use Trend Trading Strategy.
DON’T
Don’t be long when -DMI dominant
Don’t be short when +DMI dominant
DMI crosses under 25 are not trade
entries ( also consider HH-HL in DMI &
PRICE at same time and Vice-versa.)
ADX
ADX rises when DMI lines DIVERGE.
ADX falls when DMI lines CONVERGE.
In Strong Uptrend >>>> ADX rises.
In Strong Downtrend >>>> ADX rises.
The slope of ADX will rise during strong Trend
and decline during retracements.
A level of 25 in ADX is an above/below level for
trend strength.
ADX 25 level
When ADX is above 25, the trend is considered to
Be strong & valid.
When ADX is below 25, avoid trend trading
strategies (use scalp trades strategies).
When ADX falls below 25, price is usually in
consolidation period and trend trading strategies will
generally fail.
Once ADX rises above 25, the trader can use trend
trading strategies.
ADX 25 level
When ADX reaches 25 levels, the Trend will either:
Consolidate <> Continue <> Reverse.
The best BO/BD occur when ADX is below
25 for long period.
Patterns form when ADX is below 25.
When ADX is low for more then 30 bars, draw
trendlines on price and wait for BO/BD.
( BO - BREAKOUT, BD - BREAKDOWN )
ADX Strategy
Long Setup
ADX above 25 & +DMI above –DMI.
Short Setup
ADX above 25 & -DMI above +DMI.
Consolidation
ADX below 25 & DMI lines spikes above 25.
RSI
What is the 'Relative Strength Index - RSI‘
The Relative Strength Index - RSI is a momentum
indicator that measures the magnitude of recent price
changes to analyze overbought or oversold
conditions. It is primarily used to attempt to
identify overbought or oversold conditions in the
trading of an asset. (Practically, used to attempt to
identify trend & momentum in trading/investing)
RSI PARAMETERS
The RSI provides a relative evaluation of the strength
of a security's recent price performance, thus making
it a momentum indicator. RSI values range from 0 to
100. The default time frame for comparing up periods
to down periods is 14, as in 14 trading days.
RSI Above 50 : Bullish & Below 50 : Bearish.
RSI Above 60 : Extreme Bullish &
Below 40 : Extreme Bearish
RSI & ADX-DMI
DIVERGENCE
THANK YOU
ALL THE BEST
