When it comes to technical indicators, the opportunities are endless. You have hundreds of different choices. Obviously, there is no right or wrong when choosing an indicator.
However, there’s one indicator I add to almost every trading strategy. Moreover, it is also contained in many of the strategies we have at Crypto OS.
So, let me introduce the ADX — Average Directional Index indicator.
What is the ADX?
The ADX is a rather complex calculation indicator that uses moving averages, open and high prices, and much more. Luckily, we don’t need to calculate it. The indicator is available for free on TradingView and, as already mentioned, is also contained in many Crypto OS trading strategies.
Essentially, the ADX provides information about trend strength. I am pretty sure you have heard the saying, “The trend is your friend,” which means you should try to trade with the trend.
In this context, the ADX is measured as a number between 0 – 100. Although there are various ways to interpret it, we stick with the most common:
- ADX below 30: Trend has no strength
- ADX above 30: Trend shows strengths
- ADX above 50: Trend shows heavy strength
As you can see, the ADX doesn’t tell you anything about the direction. It doesn’t tell you whether the crypto asset is in an uptrend or downtrend. It “just” gives you information on whether the crypto asset is trending or not.
The screenshot below includes the ADX for Bitcoin. So, you have the typical candle view in the upper chart and the ADX in the chart at the bottom. The horizontal blue line indicates the level of 30. This basically helps to quickly spot if the ADX is above or below the crucial level. Take a minute and compare the price development to the ADX level.
How to use the ADX?
There are a dozen ways to use the ADX. We will discuss the two most common and most straightforward.
ADX as a Gatekeeper
The most common and favorite way to use the ADX is to think of it as a gatekeeper you can add to your trading strategy. That means whenever your trading strategy flashes a trade signal, you check the ADX. If the ADX is below 30 (the trend is weak), you don’t go for the signal.
Therefore, the ADX acts like a gate keeper that filters out signals that are not backed a trending market. By doing so, you narrow down the amount of potential signals. However, at the same time, you typically increase the quality of your strategy.
Advanced Gate Keeper
In an advanced version, you add the direction of the ADX to your decision-making process. That means you only open trades when the ADX is above 30 and shows an uptrend. Conversely, if the ADX is above 30 but is decreasing, you don’t open a trade.
By doing so, you can further narrow down the number of trade signals. However, you must assess whether the quality further improves or if you are limiting your signals too strongly.
Why is the ADX such a valuable technical indicator?
The ADX has a couple of massive advantages:
- Easy to use: You can add the ADX to almost every trade strategy. The indicator is straightforward and easy to understand.
- Improved quality: The quality of your trade signal usually improves since you narrow down the amount of signal and for trending markets.
- Quickly assess signals: I first look at the ADX when assessing a trade signal. If the ADX is below 30, I skip the signal. Therefore, the indicator helps establish an efficient process and filters out signals before spending too much time assessing them.
How do you use the ADX?
I would love to hear your feedback. Tell me about your experience using the ADX. Simply reach out to me on Twitter or Threads or send me an email.
Want to get started with Crypto Trading?
If you want to get started with crypto trading, you can check out Crypto OS.
It’s the platform I’ve developed based on all the mistakes I made.
It contains data-driven trade signals, backtest data, AI forecasts, trading bots, and so much more. Try it for free!
