Day trading, the practice of buying and selling financial instruments within the same trading day, requires strategic and calculative decision-making. One of the go-to tools for most seasoned day traders is the Average Directional Index (ADX), a technical analysis indicator used to quantify the strength of a trend. This article provides valuable insights into how to use the ADX indicator for improved day trading outcomes.
Understanding the ADX Indicator
Developed by J. Welles Wilder in 1978, the ADX indicator measures the strength of a trend. It serves as a means to determine if the market is trending or not.
The values of the ADX range between 0 and 100. A low ADX value (below 20) signifies a weak trend, while a high value (above 50) indicates a strong trend.
The ADX indicator is used in technical analysis to determine if there is a market trend and how strong it is. Many traders who rely on technical analysis will not open positions unless the trend is strong enough, as shown by the ADX indicator.
How to Use the ADX Indicator in Day Trading
1. Trend Identification: The first step in using the ADX is to identify the trend. If the ADX value is rising, that signifies the market is picking up momentum and the current trend (either up or down) is solidifying. If the ADX value is falling, this suggests the market is losing momentum and the current trend is weakening.
2. Trade Entry: To utilize the ADX for day trading, traders should ideally wait for the ADX value to rise above 20 before entering a position. This indicates a strengthening trend and thus a higher likelihood of a profitable trade.
3. Trade Exit: A declining ADX signals a weakening trend. Traders should consider exiting their position when the ADX begins a steady decline.
4. Divergence: If there’s a divergence between the price trend and the ADX trend, traders should be cautious. For example, if the price is rising, but the ADX is falling, it might indicate the upward trend is losing strength.
Tips for Using the ADX Indicator
While the ADX indicator is a powerful tool, it should not be used in isolation. It works best when combined with other indicators, providing a more comprehensive picture of market trends. For example, combining it with the positive directional indicator (+DI) and negative directional indicator (-DI) can help traders understand the direction of the trend.
The ADX indicator is a versatile tool that can significantly enhance trading outcomes when used judiciously. It aids in distinguishing between trending and non-trending markets, allowing traders to make more informed decisions. However, it is instrumental to remember that no single tool or indicator guarantees success in the market. A balanced approach, incorporating the ADX with other technical indicators and a fundamental understanding of the markets, will prove most beneficial in day trading.
J. Welles Wilder – the father of the ADX indicator
J. Welles Wilder (1935-2021), the man who developed the ADX indicator, was a United States mechanical engineer and real estate developer who made great contributions to the field of technical analysis trading.
Several of the indicators that are today considered core tenents of technical analysis were developed by Wild, such as the Average True Range and Average Directional Index.
The following six indicators were introduced in his 1978 book “New Concepts in Technical Trading Systems”:
- Commodity Selection Index (CSI)
- Average Directional Movement Index (DMI)
- Parabolic SAR
- Relative Strength Index (RSI)
- Swing Index
- Volatility Index
Famous quotes by Wilder
- “Letting your emotions override your plan or system is the biggest cause of failure.”
- “If you can’t deal with emotion, get out of trading.”
- “Some traders are born with an innate discipline. Most have to learn it the hard way.”
About J. Welles Wilder
John Welles Wilder was born in Norris, Tennesse, USA on June 11, 1935. His parents were John Welles “Jack” Wilder, Sr., and Frances Green Wilder. Wilder grew up as the oldest of four sibblings.
Young served in the United Stateds Navy during the Korean War, before going to North Carolina State University in Raleigh, where he obtained his degree in Mechanical Engineering in 1962.
Wilder married Eleanor Dawn Barefoot in 1958 and they had three children together: John Welles “Johnny” Wilder III, Catharine Cooper, and David Wilder. The family lived in Greensboro, North Carolina.
Wilder ran a successful real estate company, but was also interested in trading and technical analysis, and eventually founded Trend Research LTD and the subsidiary The Delta Society. His first book, New Concepts in Technical Trading Systems, was published in 1978. By 1980, Forbes Magazine was hailing Wilder as “the premier technical trader publishing his work today”, and five years later, Financial World noted how “(…) Wilder has developed more accurate commodity trading systems and concepts than any other expert”.
In 1999, Wilder and his wife moved to New Zealand, where they settled in Christchurch and were soon approved for citizenship. Wilder´s passion for technical analys was not hampered by age and he continued with his system development projects until 2008.
Wilder began showing symptoms in the 2010s, and in 2020, he was diagnosed with Alzheimer’s disease and vascular dementia. The 85-year-old Wilder died in Christchurch, New Zealand on April 18, 2021.
Books by J. Welles Wilder
- Wilder, J. Welles (1978). New Concepts in Technical Trading Systems. Trend Research. ISBN 9780894590276.
- Wilder, J. Welles (1987). The Adam Theory of Markets or What Matters Is Profit. Trend Research. ISBN 9789997619730.
- Wilder, J. Welles (1989). The Wisdom of the Ages in Acquiring Wealth. Cavida. ISBN 9780974645803.
- Wilder, J. Welles (1991). The Delta Phenomenon, Or, The Hidden Order in All Markets. Delta Society International. ISBN 9789992823262.
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