In this series, I will start discussing all the major technical indicators one by one. The first indicator on Zerodha Kite is ADX/DMS, so I will start on the ADX Indicator on Zerodha Kite and also touch on its uses on some other popular platforms. What is the full form of ADX/DMS? The full form of ADX is the Average Directional Index and the full form of DMS is the Directional Movement System.
How to Add the ADX/DMS Indicator On Zerodha Kite?
- Open any chart on the Zerodha Kite.
- Click on Studies.
- Choose ADX/DMS from the dropdown.
- Now you can see the ADX/DMS indicator attached to the chart.
- The default settings are ADX Period of 14 and Smoothing Period of 14. See the image below.
ADX Indicator on Other Platforms
The average directional index can be added to other terminals too. Here in the next example, we will see how we attached this indicator to the Upstox Pro terminal.
Here also you need to select ADX/DMS from the STUDY TEMPLATES. The default period is again 14 and the smoothing period is 14 here as well. You can select the SERIES, SHADING, and HISTOGRAM options. Also, you can change the colors of the +DI and -DI lines. See the image below to understand.
How To Trade With The ADX/DMS Indicator?
- The ADX/DMS indicator consists of 3 components.
- The +DI or PDI line – is shown in green color.
- The -DI or MDI line – is shown in red color.
- The ADX line – is shown in grey color.
- The PDI and MDI lines give buy and sell signals and the ADX line shows the trend strength.
Buy / Sell Signals From The ADX/DMS Indicator
- PDI line crossing above the MDI line is a buy signal.
- PDI line crossing below the MDI line is a sell signal.
- The ADX line rising is a trending market.
- When the ADX line is above 25 and rising it is a properly trending market. The higher the ADX value the greater the trend strength.
- On the other hand, the ADX line falling below 25 denotes a range.
So a trader can change his / her trading style using the ADX/DMS. When the PDI is above MDI with a rising and high ADX reading he should consider only buy orders (either buy on breakouts or buy the pullbacks). And when the PDI is below the MDI with a rising and high ADX reading he should only consider short-selling orders (either short sell on breakdowns or short sell on pullback rallies).
In a lower ADX reading below 25 or best below 20/15, a trader should employ range trading techniques. He can buy on dips as well as short-sell on rallies. You can use both methods on intraday (5/15 minutes chart) or swing trading (hourly/daily/weekly charts).
ADX Indicator FAQ
ADX stands for the average directional index. The indicator consists of 3 components. One is the ADX line and the other two are +DI or PDI and -DI or MDI. PDI crossing MDI above is the buy signal and PDI crossing MDI below is the sell signal. On the other hand, the average directional index line does not indicate any directions. Rather it is used to measure the trend strength. This indicator gives a clue to the overall strength of the trend. If the average directional index is high and rising the trend is strong and if it is low and falling the trend is weak.
The average directional index is a highly accurate indicator in measuring trend strength. To understand the actual direction in the market use some trend-following indicators and use ADX in addition to it to time your entry and exit.
In general, the average direction index value above 25 is considered a strong trend. Furthermore, if the ADX is rising it is also a sign of a trending market. On the other hand, if the indicator is decreasing and especially if it hovers below 25 is considered a rangebound market.
Actually, the average directional index can be used as a leading as well as lagging indicator. As the trend unfolds the indicator starts rising. This is where it is used as a lagging indicator. On the other hand, a low ADX for a prolonged time can indicate that the market can break out soon. Here traders can take an entry on a break of the upper or lower range. Here ADX is used as a leading indicator.
Charles LeBeau has a very nice video tutorial on this subject. He has explained ADX trading in a simple and effective manner. I have provided his 44-page presentation here. You can download this by clicking this download link.
I hope the presentation of Charles LeBeau will help you in identifying exact entries and exits using the average directional index and Average True Range indicator. You can also buy the full video course from Amazon if you wish.
One can use PDI/MDI lines for generating buy/sell signals whereas the ADX line is used only to judge trend strength. Remember, a high ADX does not denote a direction, it only denotes that the current trend (can be either UP or DOWN) is strong. Overall, the ADX/DMS or the ADX indicator denotes the trend strength. It must be used to confirm the signal strengths of various trend-following systems.