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.

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