Chart-Formations.com

Average Directional Index

ADX Indicator

The Average Directional Index (ADX) is a lagging trend indicator designed by J Welles Wilder and indicates the strength of a trend. In other words, when a stock is moving strongly in an up swing or down swing, or whether it's moving in a trading range. ADX is part of an indicator system called Wilder's DMI, which consists of three lines: the +DI line, the -DI line and ADX line but it can also be used on its own to help determine key turning points in the market.

The ADX indicates the strength of the current trend rather than the direction of the trend. It accomplishes this by oscillating between 0 and 100, with values above 25 generally indicating a strong, sustainable trend and values below 20 indicating a weak trend or a flat trading range ...

Momentum (MTM)

What is the Momentum Indicator?

Momentum (MTM) is a simple leading momentum indicator that is similar to the Rate of Change (RoC). Like the RoC, the Momentum (MTM) oscillator measures the pace at which a trend is accelerating or decelerating. It does this by comparing the latest price close to a price close of a specified period in the past. Thus, a 7-day MTM indicator compares the latest price close to the price close of seven days ago. Like the RoC, the MTM indicator is very sensitive to price changes and tends to be erratic.

How is the MTM calculated?

Momentum (MTM) is simply calculated by subtracting the previous price close from the latest price close using the formula:

Momentum = Latest close - Specified close

where the specified period is any previous price close specified by the trader. The result is plotted as an unbound oscillator that oscillates above and below a center line, namely the zero line.

How is the MTM used?

The key consideration when using MTM is the center line. When the price of the underlying security is in an uptrend, a buy signal is generated when the Momentum oscillator moves below the center line and starts to move back up. When the price of the underlying security is in a downtrend, a sell signal is generated when the Momentum oscillator moves above the center line and starts to turn back down.

Entry signals are also generated when a trendlines drawn on the Momentum oscillator is violated.

Chart Example

The following chart shows a 20-period MTM in the lower chart panel on a 30-minute chart of the Dow Jones Industrial Index.

DOW chart with MTM

MTM on a 30 Minute DOW chart

Wealth Warning

Trading equities, options, derivatives, currencies and cryptocurrencies, commodities or any other financial security can offer significant returns BUT it can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, proper risk analysis, and a defined set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on a trader's emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be misconstrued as a guarantee of future success!

Unless otherwise specified, the trading systems and strategies discussed on this website are intended for educational purposes only and are not meant to recommend or promote any trading system or strategy. You are expected to do your own research and testing to determine the validity of a trading method, system, or strategy on the market and instrument you wish to trade.