Detecting Trend Direction And Strength by Barbara Star, Ph.D.
Using an indicator by itself can reveal a portion
of the entire picture. Combining it with another
can reveal more.
Traders use technical indicators to
recognize market changes. They
look to indicators for signs of
price direction, momentum shifts,
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 to combine 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.