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. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Find out more about book value of equity per share, what BVPS measures and how to determine what level of BVPS indicates ...
  2. Does stockholders equity accurately reflect a company's worth?

    Learn whether stockholders' equity accurately reflects a company's worth. Stockholders' equity is found by taking the difference ...
  3. How can I spot trading opportunities looking at year-to-date (YTD) performance?

    Discover how to spot trading opportunities by looking at year-to-date performance. YTD performance is an effective tool to ...
  4. What are common growth rates that should be analyzed when considering the future ...

    Learn about some of the most commonly used measures for evaluating a company's future growth prospects and analyzing it as ...
RELATED TERMS
  1. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  2. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...

You May Also Like

Related Articles
  1. Chart Advisor

    Stocks Breaking to Downside - Time to ...

  2. Chart Advisor

    3 Ways To Trade The Bounce In Coal

  3. Chart Advisor

    How Investors are Profiting from Cyber ...

  4. Fundamental Analysis

    Are Fast-Casual Restaurants Overvalued?

  5. Chart Advisor

    Buy These Stocks on The Pullback

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!