Understanding Cryptocurrency Trading Signals — ADX/DMS in 300 words

ADX/DMS technical indicator on BTC-USD chart

The objective of this series is to explain the use of popular technical indicators used in cryptocurrency trading signals in 300 words.

I will be using short sentences so that it is easy to grasp and understand.

I will be using BTC charts from Bittrex.com for illustrations.

For a detailed overview, please visit the sources attached after the explanation.

DMS stands for Directional Movement System

1. It measures the direction of trend in the market
2. +DMS (Green Line) measures positive trend (uptrend)
3. -DMS (Red Line) measures negative trend (downtrend)

ADX stands for Average Directional Index

1. It measures the strength of the trend in the market, regardless of direction and confirms price movement (Black line)
2. It is measured from 0 to 100
3. It can also confirm if the market conditions are ranging or trending.
4. It is a lagging indicator i.e. it is used to confirm the direction of price movement and cannot be used as a trigger.

BTC 1 Day interval chart with ADX (last 6 months) — Highlighting ADX, +DMS and -DMS line. (Chart from Bittrex.com)

ADX hacks that you can use to understand signals and charts better -

1. When ADX is below 20 it is a ranging market
2. When ADX moves above 30 it indicates a strong trend. The duration of the trend is based on duration of the range before it.
3. ADX sloping means trending market conditions.
4. ADX with a flat slope means ranging market conditions.
5. When +DMS crosses -DMS, with ADX over 30 and going up, it is a buy signal
6. When -DMS crosses +DMS, and ADX is above 30 and going up, it is a sell signal

ADX hacks on BTC chart (last 6months). Chart from Bittrex.com

Directional movement is calculated by

1. Comparing the difference between 2 consecutive lows… with the difference between their respective highs.
2. +DMS and -DMS are derived from smoothened average of these differences.

ADX/DMS indicator consists of 3 lines

1. Green line which is +DMS, Red line which is -DMS and Black line which is the ADX line
2. ADX is derived from smoothened averages (14 period) of difference between +DMS and -DMS.

I would love to answer any questions you have on ADX and how to use it. Please ask any doubts you have in the comments below. I would also like any feedback you have to improve the way I explained ADX.

Full Disclosure — I am an advisor for Stature.Network and this a guest blog for their publication on medium.

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Sources

1. ADX/DMS - Technician

2. http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_index_adx

3. https://www.babypips.com/learn/forex/average-directional-index

4. http://www.investopedia.com/articles/technical/02/041002.asp