"...a bit of a problem understanding just what the ADX is...
OK, I think the best thing to do is forget what you know about other indicators. ADX works differently. In order to properly view the chart, think of the market as having four phases, in sequence: going up (trend), not going up (chop), going down (trend), not going down (chop). Most people only think of up and down, and it makes ADX unfathomable.
First of all it was developed by J. Welles Wilder in the late 1970s in order to measure how much a move is going in one direction (either up OR down). He developed two indicators, actually. The first one is called the Directional Movement Index:
aspenres.com
From that, came the Average Directional Index:
aspenres.com
Basically, if the market starts moving, it measures the net move in that direction. The higher the ADX, the more strong a trend has been. At some point, the market will begin to retrace (dip in uptrend OR bounce in downtrend). At this point, ADX will move down, as the new direction is now covering ground in the opposite direction, moving net the other way. If ADX has been rising into this, then traders attempt to position on the retracement (buy the dip OR sell the bounce), so that when the market moves again, in the direction of the trend, they will be there to make money.
A lot of people find it hard to interpret, but what you need to know is that ADX typically does not rise until a trend is already in force. You will find that the the top of a long move, ADX is likely to be in the 40-60 range, depending on the timeframe and the market you trade. For example, when all the Net stocks were at the highs, they had ADX reading of 60 or more on daily chart - signally a "parabolic" move, something totally unsustainable and vulnerable to a sudden crash.
Here are a collection of articles from Chuck LeBeau's Traders Club on the subject:
traderclub.com
traderclub.com
Some chart examples:
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Hope this helps.
Teresa |
