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ADX in a Trending Market
A way to determine if the market is trending is through the use of the Average Directional Index indicator or ADX for short.
Developed by J. Welles Wilder, this indicator uses values ranging from 0-100 to determine if price is moving strongly in one direction, i.e. trending, or simply ranging.
Values more than 25 usually indicate that price is trending or is already in a strong trend.
The higher the number is, the stronger the trend.
However, the ADX is a lagging indicator which means that it doesn’t necessarily predict the future.
It also is a non-directional indicator, which means it will report a positive figure whether price is trending up or down.
Take a look at this example. Price is clearly trending downwards even though ADX is greater than 25.
Moving Averages in a Trending Market
If you’re not a fan of the ADX, you can also make use of simple moving averages. Check this out!
Place a 7 period, a 20 period, and a 65 period Simple Moving Average on your chart. Then, wait until the three SMA’s compress together and begin to fan out.
If the 7 period SMA fans out on top of the 20 period SMA, and the 20 SMA on top of the 65 SMA, then price is trending up.