The below example shows a longer time frame where the signal occurs to late in the movement to profit.
The indicator consists of three lines which measure the price action in different ways.
A reading on the panel of between 30 and 50 indicates a very strong signal with a good chance of being able to follow the trend to profit. But once the reading gets to around the 50 level it indicates that the peak may be in and that trend following trades should not be placed.
In the examples, I have put the red line at the 25 level as this helps to identify the trend when it starts and cuts out the noise below.
This indicator is used to show you how strong a trend is but it does not provide you with any buy or sell signals. It has to be used in conjuncture with other indicators to pick entry and exit points. You will want to combine this with trend following strategies.
The indicator consists of a separate panel with usually a reading of between 0 and 50 but it can go higher. The higher the reading the strong the trend and vice versa.
Changing the Settings
The ADX is determined by using a certain number of candles and the standard setting used is 14, which is what has been used in the above examples. This can also be modified to calculate for shorter time frames which give a more rapid response to changes or longer time frames to pick out stoner confirmed trends.
The issue with using longer time frames is that when the trend has been confirmed you have already missed much of the time to profit. The shorter time frame also has issues due to it giving too many false positive signals and can be misleading.
In the below example we have reduced the setting to just 7 which illustrates the issues.
When the blue line representing the ADX is below 25 then it indicates a market trading in a range. When the line moves above the 25 level, the markets are now in a trending phase.
The DI+ and DI-
These two lines help to determine which direction the trend is going. This can be seen by the interaction of the DI+ and DI-.
The DI- line goes above the DI+ line it means that the trend is rising. In the above example the DI+ is rising above the DI- line the trend is falling.
One thing to note is that changing the settings does not affect what the lines represent and the set levels are still valid, it is just changing the reference of time for its inputs.