ADX is a trend indicator. It indicates the strength of the trend, and also the direction. ADX EP, based on this indicator, introduces important variations to make it easier to interpret.
What is the ADX indicator and how is it interpreted?
The ADX indicator is made up of three intersecting lines. One of them indicates whether or not there is a trend. The crossing of a horizontal is taken to determine when we are in a period with a trend and when it is better not to trade, depending on whether the ADX value is above or below this horizontal.
The + DI and -DI lines indicate the direction of the trend. The intersections of these two lines are taken as entry points.
What does ADX EP provide?
The modifications introduced in the ADX make its interpretation easier. In addition to coloring the areas, an oscillator has been introduced that indicates the distance between the + DI and -DI lines. The position of this oscillator and its crossings on the zero line or above the average line will give us clearer signals of entry or exit from the market.
Also, the colors displayed on the oscillator will show the areas where the buying trend is decreasing (the color changes from green to red). The same for the case that the selling trend, in red, is compressing, the color of the oscillator will change to green, indicating this circumstance. These color changes will never be taken directly as buying signals.
ADX EP in action.
In the following image we see the inputs provided by the ADX EP indicator:
Purchase patterns in ADX EP.
The color displayed by the ADX will indicate if we should look for purchases or sales. The narrowing of the color zones will indicate that a change in the price movement is likely to occur. In the oscillator, this narrowing is reflected in minimum values, close to line 0.
The time to enter the market would be when the oscillator crosses the horizontal upwards, turning green and separating the lines that form it. This will indicate that the buying force is intensifying.
As we see in the image, we can also take into account the raising of the oscillator on its average.
For its part, at the bottom of the indicator, we see how the gray area (trend increase) and the green area (the trend is buying) increases.
Sales patterns in ADX EP.
To enter the sale, we will use the opposite situation: the oscillator crosses the horizontal (or its average) downward, becoming red, while at the bottom we see an increase in trend (gray area) and selling force (red area)
When there is no defined trend, the indicator will show values in the ADX below 0 (the gray area is shown below zero or very close to 0). The oscillator is also shown flat, close to zero. We clearly see this situation in the following image. After slowing down a slight fall in the price, it enters a zone of indecision, alternating slight increases with small decreases:
In these situations we will not seek purchases or sales until a more solid trend forms again.
The highest value of the ADX indicator is that of support for signals given by other indicators. As a general rule, we will follow these guidelines:
- Take into account the supports and resistances. We will not buy near a resistance, nor will we sell near a support. Buy patterns will be stronger near support, and sell patterns near resistance.
- We will not act if the value of the ADX (gray area) is lower than the horizontal or oscillates above the horizontal but very close to it. The market does not have enough trend (side market), and it is better to stay on the sidelines.
- We will not search for purchases if the color shown by the indicator is red, unless a narrowing is taking place, which could indicate a change in trend. In this case we will always make the decision based on the signals given by another indicator.
- We will not look for sales if the color shown by the indicator is green, unless a narrowing is taking place, indicating a possible change in trend. As in the previous case, the signal will be given to us by another indicator.
The image shows areas where in theory it would be better not to intervene, since the ADX shows us a lack of trend.
In our strategy, we use EP ADX together with other indicators: EP Zenith, EP MA Diff, EP Change Index .... You can use other indicators, those with which you feel more comfortable.