Page 60 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

Average Directional Index

The average directional index (ADX) is a trend indicator that’s used to measure the
strength of the current trend – although it has limited use identifying the direction of the
current trend.

The ADX is comprised of the positive directional indicator (+DI) and the negative
directional indicator (-DI). The +DI measures the strength of the uptrend while the –DI
measures the strength of the downtrend. These two measures are also plotted along
with the ADX line that measures on a scale between zero and 100.
Traders generally look for readings below 20 that signal a weak trend or readings above
40 that signal a strong trend.

Moving Average Convergence/Divergence (MACD)
The moving average convergence-divergence (MACD) is one of the most powerful and
well-known indicators in technical analysis. The indicator is comprised of two
exponential moving averages that help measure momentum in a security. The MACD is
simply the difference between these two moving averages plotted against a centerline,
where the centerline is the point at which the two moving averages are equal. The
exponential moving average of the MACD line itself is also plotted on the chart.
The MACD compares short-term momentum and long-term momentum to signal the
current direction of momentum rather than the direction of price. Traders can think of it
as the ‘derivative’ of price-based moving averages.
When the MACD is positive, it signals that the short-term moving average is above the
long-term moving average and the security’s momentum is upward. The opposite is true
when the MACD is negative, which signals that the short-term moving average is below
the longer-term average and suggests downward momentum.

The most common EMAs used in the calculation are the 26-day and 12-day averages,
while the signal line is often created using a 9-day MEA of the average of the MACD
values. These values can be adjusted by traders, but it’s worth noting that these values
are the most widely followed.

The MACD histogram is also plotted along the centerline using bars. Each bar
represents the difference between the MACD and signal line, or in most cases, the 9-
day exponential moving average. Higher bars in either direction represent greater
momentum behind the price movement.

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