The Average Directional Index (ADX) is a technical analysis indicator that helps traders determine the strength of a trend, whether it's up or down. It is often used alongside two accompanying indicators:
- Negative Directional Indicator (-DI)
- Positive Directional Indicator (+DI)
The price is moving up when +DI is above -DI
The price is moving down when -DI is above +DI.
Logic of the algorithm:
- The algorithm looks for the ADX value to meet the strength requirement set by the user. The ADX value represents the strength of the trend, and the user can set a specific threshold to determine when the trend is considered strong enough.
The algorithm checks whether the +DI is greater than the -DI. If +DI is above -DI, it indicates that the price is moving up, signaling a potential uptrend.
Once the conditions of both the desired strength and the +DI being higher than -DI are met, the algorithm generates a signal indicating a potential long trade opportunity.
- The configuration is pre-set to use 1-hour candles over 14 periods to seek confirmation for a 'long' trade with a strength requirement of 32.
To provide additional confirmation, the algorithm suggests combining the ADX with a volume increase indicator. Increased volume during a price move can further validate the strength of the trend and add more confidence to the trade signal.
Traders can adjust the settings of the ADX, +DI, and -DI indicators based on their trading strategy and time frame preferences. Additionally, they can experiment with different combinations of indicators to fine-tune their trading signals and improve their overall trading strategy.