(Adx Macd) Stocks modities Magazine Trend Trading Articles.pdf

Stocks & Commodities V. 20:1 (22-25): Detecting Trend Direction And Strength by Barbara Star, .
TRADING BASICS
Combine ADX And MACD
Detecting Trend Direction
And Strength
Using an indicator by itself can reveal a portion
of the entire picture. Combining it with another
can reveal more.
by Barbara Star, .
raders use technical indicators to
recognize market changes. They
look to indicators for signs of
price direction, momentum shifts,
T and market volatility. Among the
most sought-after indicators are
those that identify price trends. Traditionally,
moving averages serve that purpose, but they
suffer from whipsaw action during price
consolidations. However, there is another
approach. This article shows how bine two
popular indicators to help traders detect not only
trend direction but also trend strength.
The indicators involved are the average
directional index (ADX) and the moving average
convergence/divergence (MACD). The ADX
functions as a trend detector, rising as price
strengthens into an identifiable trend and falling
when price moves sideways or loses its trending
power. ADX values in the 20 to 30 range indicate
mild to moderate trending behavior, while
values above 30 usually signify a strong trend.
Unfortunately, the ADX does not reveal the
trend direction. The MACD, on the other hand,
indicates price momentum and can also be used
to identify price direction as it rises above its
trigger line or falls below its zero line.
When both indicators are plotted on the
same chart, trend strength and trend direction
e clear. The chart of AOL Time Warner
(AOL) in Figure 1 illustrates how the two
plement each other. The ADX
in the upper panel rose from April through
May 2001, indicating a trending market. The
MACD rose above its dotted trigger line and its
zero line, showing that price direction was up.
During July and August the ADX rose once
again, but the MACD was th