Many professional investors use a technical indicator called ADX in order to understand the ongoing trends in a better way; while for those who just entered the share market for short-term trading, how to use ADX for intraday trading is still an intriguing question.
Now that you are here, let’s together understand this lagging technical indicator and know how to use it for day trading in a better way!
What is ADX Indicator?
Well, keeping it simple, ADX is known as the Average Directional Index or Average Directional Movement Index.
This indicator is categorized into lagging indicators and is used to determine the strength of a trend. However, many confuse it as a directional indicator. ADX is purely a non-directional technical indicator.
Also, it is worth knowing that there are two versions of the ADX indicator,
In the first version, traders use a single line called the ADX line to know the strength of an ongoing trend.
In the second version; this indicator comprises 3 components namely, the ADX line, positive directional indicator (+DI) line, and the negative directional indicator line (-DI).
But, what do these DI lines indicate?
As the name suggests, since the ADX line only determines trend strength, the two DI lines help the trader in understanding the direction of the trend more accurately. Together these three lines predict the presence of a strong trend in the market.
Now as already discussed that ADX indicator tells the strength of the trend. To understand it in simple language, the price going down with the ADX indicator moving upwards gives a strong bearish signal.
So, let’s move ahead to understand how to use ADX for intraday trading.
How To Set ADX Indicator for Day Trading?
Now specifically considering the indicator for intraday trading, why it is important to reset it.
Well, that is because indicators are time-sensitive and give the best result in day trade when reset for a shorter time frame.
So, what is the best time frame for the ADX indicator for intraday trading?
It is for 3 periods. With this time frame, the indicator becomes more sensitive to the price and thus gives a better signal.
Now as already discussed, low ADX reading means the strength of the trend is weak while a higher ADX reading depicts a stronger trend. Also, when it comes to price movement, it is seen that the price moves from periods of consolidation to trending and vice versa.
Combining these two factors, let’s now discuss that how the ADX indicator works the best.
Here the low ADX reading i.e. the consolidation should be followed by the high ADX reading. Thus one must look at reading 25 to make a buying or selling decision.
The reading of ADX falling below 25 in the day trading chart suggest that there is no strength in the trend and it is good for traders to wait for the potential breakout signal.
But here comes another challenge, as the ADX indicator does not give any idea of the direction, and hence one must wait for the time until ADX breaks above 50.
If both price and ADX rise, make a buying decision
If the price is falling but ADX is rising, selling or shorting gives a better trading result.
The threshold value of the ADX indicator ranges from 0 to 100. And 25 is considered as the benchmark to take action. Let us see how;
So as per the facts by many professional traders, it is said that;
When the ADX line moves above 25, it indicates a trending market.
And if the ADX line slides below 25, no such trend is to be expected for the market to show a consolidated phase for that particular time. Now, in this case, a pause in the trend is indicated and it is said that after a certain point of time, the pullback might happen and the underlying trend shall continue.
Overall, a rise in the ADX line indicates an uptrend, however, if you remember, as mentioned earlier, ADX is non-directional, hence even in a downtrend, ADX might continue to rise.
Talking about the direction of the trend, this is where the positive and negative directional indicators come into play.
When +DI is above -DI: Buyers are in control of the market and thus the stock price will tend to go up.
When +DI is below -DI: Sellers are ruling the market, there are high chances that the price of the stock will go down.
And when these two lines are combined with the ADX line then;
When +DI is above the -DI and ADX line is above 25 a strong uptrend is seen and thus at this point, the trader gets the signal to go long.
When +DI is below -DI and the ADX line is rising, a strong downtrend seems to follow and thus short selling can be a good choice during this time.
However, there are always certain limitations to these technical indicators or as we can some exceptions.
For example, there are times when prices might fall with the dipping of the ADX line, but as we know the stock market is unpredictable so the inputs can vary for individual traders as per his or her trading style.
Additionally, when the ADX line is seen moving downwards, it merely indicates a weakening of the ongoing trend which can be either bullish or bearish, irrespective of the direction.
Now the next question on your mind might be, How to use ADX indicator for intraday trading in charts?
First of all, the trading platform that you are using needs to be advanced enough to offer this indicator during the technical analysis of the stocks.
For example in Angel One, traders get about 100+ technical indicators to experiment with and thus create varied strategies altogether.
Let us see step by step how to use ADX indicator in intraday trading.
STEP 2: Select the “Markets” option from the menu bar at the top.
STEP 3: Select the stock, say, Bajaj Finance.
Here you see, Angel One offers both versions of the ADX indicator. However, as we are going to anticipate the direction of the trend, hence we are going to use “DMI”, a directional movement index.
STEP 4: Now in the image below;
The circled area indicates a good buying signal as the +DI line (Blue line) is above -DI line (Orange Line) and the ADX line (Redline) is showing a value above 25. So it can be anticipated that a strong uptrend is going to follow.
While in the image below,
The circled area here gives a decent buy signal, as you can see.
The +DI is sliding below the -DI line with ADX still rising leading to a strong downtrend signal.
This is how to use the ADX indicator for intraday trading using the advanced trading platform to do proper analysis using different indicators like ADX and increase the chances of making profitable trades.
Now for a beginner, it is challenging and difficult to understand the technicalities of indicators. But to give yourself a good start you can rely on some of the best books on technical analysis.
With these books, you would be able to understand the detail of what technical analysis of a stock is and also get to know more about the usage of technical indicators.
Here is the list of books that you can refer to strengthen your knowledge:
Technical Analysis Books
Getting Started in Technical Analysis
Technical Analysis Explained
Martin J. Pring
Technical Analysis for Dummies
Trading and Technical Analysis Course
Technical Analysis of the Indian Stock Market
The authors in the book tried to explain the technical aspects of the market and also stated their own points on how they view the market. Further, the right technical indicator and chart usage is defined in very simple language.
Along with the concepts of the global market, you can enhance your learning of the Indian stock market by considering the books of Indian authors listed in the table above.
Hence you see, using the three components of ADX indicators helps in identifying the strength of the ongoing trend along with the direction and learning how to use ADX in intraday trading.
Yet one should always remember since the stock market is unpredictable, it is important to experiment, especially in intraday or any other short-term trading. As every individual has his own style of trading and technical analysis.
Sometimes accuracy of this indicator is compromised and so, ADX or DMI is combined with other indicators such as support and resistance in order to analyze the most precise breakthrough and pullback moments in the chart.
Keeping the ultimate goal firm- To make good intraday trading profits, any trader must know when to enter the market and when to exit as per their own research and strategies. And thus fill up their pockets.
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