This also stays true for the opposite where you are in an uptrend and the ADI diverges to the downside. The below example shows an example of the ADI showing a bearish signal, allowing you to take a short position.
One way around this issue of losses during trending markets is to trade in line with trend only. This can be done by trading during very strong and sustain movements on any of the pullbacks. So if the market is going up you would buy on the dips and when the market is going down you sell on the peaks. Using this technique can stop you from sustaining heavy losses when the market is trending and not ranging.
The basic principle of this indicator is to look at the relationship between the price action and the number of buys and sellers in the market. It does this by looking for divergences between the price and the indicator
If the market is in a down trend for a particular asset and there has been a slight pull back in the trend, this could signal that the buyers are coming back into the market. You can see this by looking at the ADI as it will start to move in the opposite direction. This can be seen in the below chart.
This is a momentum indicator that helps to predict reversals by identifying where the tops and bottoms are. Unlike other lagging indicators this indicator is used to predict when reversals will take place to enter before and not half way during the new trend.
The indicator will show in a panel below chart with a single line as below.
When does the ADI Work Best?
This indicator is best deployed when the market is ranging or just trading sideways with little movement in either direction. If the market is trending, moving in either direction, as the markets continue to pause giving you false signals. Due to these signals, this strategy can sustain heavy losses and should be used in tandem with another indicator that helps you spot when the market is trending such as the ADX indicator.