A:

In technical analysis, there have been numerous indicators invented for identifying trends. One of the most common of these indicators is known as the average directional index (ADX), which is used by traders to determine the strength of a given trend by looking at the indicator's values, which range between zero and 100. Readings above 40 generally suggest that the given trend is strong, but these readings do not provide any insight into the trend's direction. Technical traders use ADX readings below 20 to suggest that the trend is weak or that they could expect to see the price of the underlying asset trade within a confined range.

Because readings greater than 40 indicate a strong trend, this generally means that the price movements for any given day are more volatile than when the trend is flat or weak. An ADX that falls below 40 suggests that the trend may be weakening or reversing and is often the time when traders will notice the largest spike in volatility. Volatility also picks up as the strength of the trend starts to increase; therefore, a move above 20 can also suggest an increase in volatility. Because the primary role of the ADX is to identify the strength of a trend, traders who wish to monitor volatility may want to turn to Bollinger Bands®, standard deviation or various technical chart patterns.

For more on the ADX see, Discerning Movement With The Average Directional Index.

RELATED FAQS
  1. How does a stop-loss order work, and what price is used to trigger the order?

    A stop-loss order, or stop order, is a type of advanced trade order that can be placed with most brokerage houses. The order ... Read Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Answer >>
  3. Can working capital be too high?

    Learn more about the working capital ratio, and understand how an excessively high ratio can be considered a negative in ... Read Answer >>
  4. What are some of the most common technical indicators that back up Doji patterns?

    Learn important technical indicators that reinforce a doji candlestick pattern to take advantage of profitable trading opportunities. Read Answer >>
  5. How do I use discounted cash flow (DCF) to value stock?

    Understand the meaning and significance of discounted cash flow, and learn how market analysts commonly use this stock evaluation ... Read Answer >>
  6. Tame Panic Selling with the Exhausted Selling Model

    Discover what the exhausted selling model is and how it can be used by traders who are looking to profit from the panic sale ... Read Answer >>
Related Articles
  1. Chart Advisor

    Sector Headwinds Buffeting First Solar (FSLR, TAN)

    First Solar has entered a new downtrend after failing to break out above two-year resistance.
  2. Chart Advisor

    Better Buy: Home Depot or Lowe's? (HD, LOW)

    Home Depot and Lowe’s have risen to resistance levels that could yield fresh trend advances.
  3. Chart Advisor

    3 Short Sales in the Apple Ecosystem (AAPL, SWKS)

    Deteriorating sentiment should offer profitable short sales on the key Apple suppliers.
  4. Chart Advisor

    Amazon Levels to Watch After Earnings (AMZN)

    An Amazon rally above 650 after earnings should open the door to a test of the bull market high.
  5. Investing

    Mergers & Acquisitions Report: 2 Trends in the Market

    Learn what attracts buyers and sellers into today's M&A market, as well as what trends are emerging in 2016 by sector and location.
  6. Chart Advisor

    Nasdaq-100 Weakness Waving Red Flags (QQQ, SPY)

    The Nasdaq-100 is lagging blue chip and small cap indices, signaling a bearish divergence that could end the recovery wave.
  7. Fundamental Analysis

    Alcoa vs. BHP Billiton: Which Is Better for My Portfolio?

    Obtain an up-to-date overview of BHP Billiton and Alcoa, Inc., two key players for investors seeking exposure to the aluminum market to consider.
  8. Chart Advisor

    Wait for a Pullback to Buy Pan American Silver (PAAS, SLV)

    Pan American Silver is trading just two points from resistance, warning sidelined players to wait for a substantial pullback.
  9. Chart Advisor

    Apple Levels to Watch After Earnings (AAPL)

    Apple needs to trade above 115 or below 90 to escape magnetism created by technical conditions in place since a 2015 breakdown.
  10. Chart Advisor

    Oil Services Fund Still Hasn't Entered a New Uptrend

    Market Vectors Oil Services ETF needs to rally above 33 to end the two-year downtrend.
RELATED TERMS
  1. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure ...
  2. Oversold Bounce

    An oversold bounce is a rally in prices that occurs due to the ...
  3. Relief Rally

    A relief rally is an increase in market prices that occurs because ...
  4. Intralinks Deal Flow Predictor - DFP

    The Intralinks Deal Flow Predictor (DFP) is a leading indicator ...
  5. Golden Cross

    A crossover involving a security's short-term moving average ...
  6. Cup and Handle

    A pattern on bar charts resembling a cup with a handle. The cup ...

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center