The average directional movement index Tool -

The average directional movement index Tool

The average directional movement index is a highly accurate trend indicator. Unlike other tools, it does not represent a movement of commodity price. It shows actually shows the strength of the price. This allows to trader to make better judgement  The risk of fluctuations and false moves is decreased. These are utilized to generate trading signals, their direction and their strength.

 

The average directional movement index : How Does it work ?

The Average directional movement index consists of Positive Di and negative Di line. There represent the upward and downward trend made of the price of the commodity selected. There is a simple formula to calculate these. Just choose the higher of the current period and the low point of the period before it i.e. high point minus 1. The upward move is equivalent to the high point of the period minus the high period noted before. Similar is the case with low point.

 

The average directional movement index Procedure

If you find the manual work a hassle, then here is a guide to use the free online Average directional movement index tool:

  1. Download the free tool from any trading platform.
  2. Choose the respective commodity, stocks or currency, and apply the required settings.
  3. The next step includes reading the graphs. It consists of a blue main line, and two additional red and green lines. If the red line goes above the green, it is a sign that the bears are holding power and vice versa.
  4.  Trade: once the index is above 20 or 25, consider the price trending and base your strategies on that for a successful outcome.

The average directional movement index Limitations

There are some limitations associated with this. One is that it analyzes the price movements using a mathematical formula, so calculations can be slow. This lag can sometimes result in late price reflection. Also, below 20 ADX, there is no advantage of this.

The average directional movement index Warning

One needs to be careful when the Averade directional movement index reaches between 50 to 60. If something like this happens, one might need to retract his moves or select consolidation.

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