Does a strong trend (ADX > = 40) cause an increase in volatility?

By Casey Murphy AAA
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 important are seasonal trends in the automotive sector?

    Learn more about the automotive industry, including the strong seasonal sales trends for the industry and some of the major ...
  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Learn where analysts and investors can find the three pieces of necessary information that allow them to calculate the dividend ...
  3. What does the Dividend Discount Model (DDM) show an investor about a company?

    Discover the purpose of the dividend discount model, or DDM, of stock analysis and what it specifically aims to evaluate ...
  4. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ...
RELATED TERMS
  1. Fintech

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

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

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

    The excess of the market value of an asset over its book value. ...
  5. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  6. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...

You May Also Like

Related Articles
  1. Charts & Patterns

    Why These May Be the Top 4 Growth Stocks ...

  2. Chart Advisor

    Interested in Growth Stocks? See These ...

  3. Chart Advisor

    Watch Out For Falling Copper Prices

  4. Chart Advisor

    Watch for Bullish MACD Crossovers in ...

  5. Trading Strategies

    Bucking The Trend With Pattern Failure ...

Trading Center