Average Directional Index Definition: Day Trading Terminology
The average directional index (ADX) is a technical indicator that is used to signify the strength of a trend. It is a non-directional indicator, so it signals trend strength with no reference to whether it is an increasing or decreasing trend.
The ADX is most commonly used alongside directional indicators as a complementary source of information that offers further details about trends that are first identified using the directional indicators.
Trading With the Average Directional Index
Most trading strategies start by identifying trends, and this is particularly true in day trading strategies. Day traders can use the ADX as a method of sorting potential trades, with any ADX over 25 considered to be a strong trend. Strong trends often present better day trading opportunities, as these implicitly involve substantial price movements.
Day traders can use a strong trend in a number of different ways. For example, a strong trend can represent a steady rate of increasing prices, which allows the trader to buy any small dips in the price with the confidence that they will be corrected upwards as the trend continues.
Alternatively, a strong trend can represent theuture possibility of a major reversal, which allows the trader to monitor these securities and wait for other technical indicators that suggest an imminent sharp reversal in the trend.
The Average Directional Index in Your Day Trading Toolkit
The ADX is another tool in your day trading toolkit. Since trends play such an important role in most day trading strategies, having a simple universal indicator for trend strength is extremely valuable. Using the ADX involves understanding what it is indicating and how to combine that information with other relevant technical indicators.
As with any technical indicator, the ADX is only useful as an element of a thorough and robust trading strategy involving multiple sources of complementary information.