Cryptocurrency prices can be unpredictable, fluctuating up and down on a moment’s notice. Multiple sources can cause this fluctuation, including positive news about that currency or the technology behind it. If you’re planning on investing in a cryptocurrency that experiences drastic changes in price, understanding the price fluctuations, how severe they are, and how likely those prices are to continue trending in their current direction is absolutely critical for netting a positive investment. One way you can begin to understand these fluctuations is through technical indicators, or metrics that measure different aspects of stocks or currencies using historical data. In particular, you could use the average directional index, or ADX, to understand how strong a price trend is and how likely that price trend is to continue for a long time.
What is ADX?
The average directional index is a metric for confirming and quantifying the strength and likelihood of a price trend to exist and continue existing. To calculate ADX, a moving average of price range over a set of time points for any stock or currency is calculated. The index is derived from the directional movement indicator and outputs a value between 0 and 100.
It’s important to note that this index does not change its direction in a price downturn; when a trend is stronger, ADX increases no matter the direction of the trade. Therefore, you’ll need to pay careful attention to the price over the time period you set. If ADX is rising as price decreases, it means there is a higher likelihood of that price continuing to decrease. Along with this non-directionality of ADX comes the perception that falling ADX means there is a price reversal in the near future. This is not true, and trends may continue even if ADX peaks and falls back to a smaller value.
Traders generally use four ADX value ranges to decide the strength of a trend. If ADX values are below 25, they are considered extremely low and any trend you may observe is weak. It’s unlikely that the trend will continue. Values below 25 are by far the most common values you will observe for any stock or cryptocurrency. If the value is between 25 and 50, there is support for a price trend and could be an indicator to buy or sell. Between 50 and 75, support for that trend is even greater. Finally, ADX values between 75 and 100 indicate an extremely strong trend and indicate that the trend is likely to continue.
How can ADX be used for cryptocurrency?
If you’re interested in a particular cryptocurrency and you notice price steadily increasing or decreasing over a period of time, it may be wise to calculate both the directional movement indicator and the average directional indicator. It’s recommended that you calculate ADX over a 14-day period, with an arbitrary time set for the closing time. Though that time is arbitrary, many use the United States stock market closing time as a standard for technical indicator calculations. The values output by the ADX calculation in combination with some news research on that particular crypto will give you a much clearer picture of its price trend than if you had simply scanned the news. If you’re confident in a positive price trend and ADX is showing a high value, then you may be wise to purchase that currency for at least a short hold.
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