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Yes this what I was seeking a understanding of this widely used ADX.
Thanks,
Robert
, CRLeBeau@xxxxxxx wrote:
>
>In a message dated 12/13/98 6:13:12 PM, rwc@xxxxxxxxxxxxx writes:
>
><< know for me I just don't realize the intended purpose of some of these
>indicators and some I THINK I do. So if the list thinks this would be
>something you could benefit from being discussed join in.
>
>I'll start with one that has always mystified me but seems to be used a lot
>by many.
>Is this indicator seems to be designed for breakout systems or money
>management exits. Anybody using this a different way or what ever?
>
>ADX
>>>
>
>Robert, The following information was extracted from Traders Club Bulletin
>#5. If this is the type of information you are seeking you can go to the web
>site for a continuation of the ADX discussion in Bulletin #6. Hope this
>helps.
>
>(Begin article by Chuck LeBeau) ADX has its limitations. (I’m referring to
>Welles Wilders Average Directional Index in case you are a “newbie”.) After
>many years of extolling the virtues of the ADX in articles and lectures all
>over the world I have become closely associated with this indicator. That’s
>fine with me and I don’t mind being considered the resident expert on ADX.
It
>is an excellent measure of trendiness and a good indicator to be linked
with.
>
>However, I think it is a mistake to try and over work or become too dependent
>on any one indicator. If you were going to build a house you would need more
>than one tool and you wouldn’t try to do it with just a hammer. The same is
>true of building systems. The ADX can be a very valuable tool if used
>correctly but it has some major shortcomings that everyone should be aware
of:
>We all know that the ADX is slow. This is because of all the smoothing in
the
>formula. The basic ingredients are smoothed and then the results are
smoothed
>again. For example I think it takes more than 30 bars of data to calculate a
>14 bar ADX. This smoothing makes the ADX slow but there is an even greater
>problem than just the speed of the indicator. The logic of measuring
>directional movement makes the ADX very reliable at certain times and very
>unreliable at other times.
>
>A rising ADX is a reliable indication of a trend when there has been an
>extended sideways period before the trend gets started. Before all the high
>tech computer mumbo jumbo we used to simply refer to this sideways period
as a
>“basing pattern”. The ADX is most effective when it begins to rise from a
low
>level (low = 15 or less). This low level on the ADX indicates that there has
>been a basing pattern for a while. This interpretation is contradictory to
>those users of the ADX who want to see the ADX cross above a specified
>threshold (usually 20 or 25) to indicate that a trend is underway. This
>technique would make the ADX even slower and means you would be confirming a
>trend and entering your trade long after the basing pattern was broken. But
>even if you were late due to your method of interpreting the ADX, following
>the ADX after a base pattern is still quite reliable. The potential problem I
>want to bring to your attention in this article is the action of the ADX
after
>major peaks and valleys.
>
>The logic of the ADX is best visualized as measuring directional movement
over
>a moving window of data on a bar chart. If we have sideways data in the
>window followed by recent trending data (lets think of rising prices but it
>could be the reverse), the rising prices would show directional movement
>relative to the sideways data at the beginning of our window. The ADX would
>promptly rise and call our attention to the fact that there is now a
direction
>in prices that should continue for a while.
>
>However, if the prices rise for an extended period and then begin to fall
>sharply (a typical scenario) we now have a window of data that shows rising
>prices followed immediately by falling prices. The ADX formula measures the
>rising prices in the window and compares them with the declining prices in
the
>window. Because the two trends are about equal they cancel each other and
the
>ADX does not detect any net directional movement. The ADX now begins to
>decline indicating that it is finding no net directional movement in the
>period measured by the window.
>
>As the window moves forward, eventually the older rising price data falls
>outside the back of the window so that the window now contains only the more
>recent downward price movement. The ADX suddenly begins to rise rapidly
>because the data window at this point contains only one trend. The problem
>with this new signal is that the downward trend in prices has been underway
>for quite some time and only now has the ADX finally begun to rise. This is
>obviously not a good point to be entering a trade to the short side. We are
>probably nearer the end of the trend than the beginning.
>
>Remember that the ADX works best after a basing period and is unreliable
after
>a “V” bottom or top. That’s all for now. I’ll continue this discussion of
>the ADX in our next bulletin. (End of article)
>
>For your info, all the past Traders Club Bulletins can be viewed at
>
>http://traderclub.com/bulletin.htm
>
>Chuck LeBeau
>
>
>
>
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