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.

  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
Related Articles
  1. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  2. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  3. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  4. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  5. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  6. Investing

    10 Cheap Vacations for the Ultimate Foodie

    If you are a foodie then explore one of these destinations in 2016.
  7. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  8. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  9. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  10. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  2. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  3. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  4. Discounted Cash Flow (DCF)

    Discounted cash flow (DCF) is a valuation method used to estimate ...
  5. Middle Market

    Definition of middle market
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present ...

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center