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HOW TO TRADE 101: The Average Directional Index

by , 23 October 2020
HOW TO TRADE 101: The Average Directional Index
Q. Timon is the Average Directional Index indicator a good one for determining the trend for the JSE All Share Index? What are your thoughts?

A. You know Mark, I wish I got more questions with regards to indicators…

I know I am a breakout trader by profession, but I love to analyse using other indicators when looking at the charts.

Before we do the analysis, I need to let my readers understand what the Average Directional Index (ADX) is.

The ADX is a closed indicator that tells us, what strength of the trend the market is in (up, down or sideways).

Here's what it looks like and how the ADX works...
First, it’s called a closed indicator, because it has a range limit between 0 to 100.
Second, there are three lines (Green, Red and Black) that is included with the indicator…
The Average Directional Index line (Black).
The Negative Directional Indicator (-DI) line (Red).
The Positive Directional Indicator (+DI) line (Green).
NOTE: The black line is the main one we look at, when we analyse.
Third, there are two indicator levels you’ll be watching with the ADX:
20 and 40 (Black horizontal lines).
If the ADX trades above 40, this means it’s in a strong trend…
If the ADX trades between 20 and 40, tells us the trend is weak.
If the ADX trades below 20, this means the market is not trending at all…
What trend is the ALSI in? Let’s find out with the ADX…

We can see that since June, the strength of the ALSI trend has been below the 20 mark.
This clearly told us that the uptrend has come to an end, and now it was about to enter into a sideways market.
And when we look at the ALSI, we can see that it’s been moving in a sideways range, since June.
However, it looks like things are about to change very soon.
The ADX line has just crossed above the 20 mark. Which means that a new trend is about to form… And I believe the ALSI is about to turn up.
In the last two weeks, we’ve seen strong buying (volume) and price action kick in and it’s about to break out of a triangle formation.
Even the markets on my watch list, are telling me that there are high probability trade ideas lining up in the near future. Make sure you’re on board Red Hot Storm Trader, or you’ll miss them…
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“The MATI Trader System Programme was a really good start to my trading. It was a lot of information, but not too much to absorb. I now want to join a MATI Trader System Programme webinar! Are you looking into it at all?”
Timon Answers: Yes, take your time to go through the videos, book and calculators. It’s not something to watch once and then put away.
Also, I have most definitely been thinking of running LIVE Trading webinars on Zoom with around 20 people or so. Keep setting a reminder for Trading Tips because your wish may just come true this year…
READ: Could this be the biggest investment story of 2020? go here to find out.
Q. “Joshua Benton mentioned in one of his South African Investor issues about Rebalancing Portfolios… What does this mean and when do you rebalance yours Timon?”
A. Rebalancing is basically looking at different assets that make up your portfolio and re-aligning the weightings of each asset.
So you'll buy or sell your assets and change the weighting of your current portfolio...
It’s always important to monitor your portfolio, and keep it up to date with the current market movements.
What I do when rebalancing is, I look at all of my positions and funds and make sure there are none that are dragging my portfolio down. So this year, I have been adding more resource stocks into my portfolio as they have been outperforming banks and financials…
As a short-term trader, I pretty much rebalance my portfolio once a month in order to catch the outliers or laggards that aren’t performing well…
 But I believe Joshua Benton rebalances his portfolio once every six months or so, as he looks more into medium to long term investments… And that’s why he shares The South African Investor portfolio on a monthly basis to compare what’s changed and how it’s performing…
Trade well, 
Timon Rossolimos,
Analyst, Red Hot Storm Trader

HOW TO TRADE 101: The Average Directional Index
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