The Indicator Most Likely To Identify 10X Returns: The ADX

Technical indicators have been used by analysts for many years. Technical analysts use historic data from analyzing the past movement of the price to make speculation on the price direction of the financial instrument in the future. These indicators are pattern-based and get their data from the price, volume, or open interest data. 

It is important to note that using technical indicators is a reactive trading system and doesn’t predict the future but rather quantifies the risk and returns. This gives a trader an insight into the best price to enter or exit a trade. 

In this article, we will delve into a rarely used technical indicator, the ADX indicator. ADX connotes for Average Directional Movement Index. What is amazing about this indicator is its ability to identify stocks that are about to start a new uptrend that ends up with the stock returning 5 to 10 times its initial price. This is perfect in the current market conditions, where we have seen countless stocks like Pinterest, Snapchat, Fastly, DataDog all returned 5-10x this year. If using the ADX, it would have properly identified these stocks. To see the ADX in action, take a look at the chart below, to get a feel of what will be discussed in this article.


How It Is Calculated 

The indicator is used in measuring the overall strength of a trend. The values used are usually adopted from the moving average of the prices of a security. The moving average indicator can be interpreted as when the prices are rising, they tend to pull the average prices of the security up creating an upward-sloping graph and vice-versa. This is the raw data that the ADX indicator uses to introduce two new lines +DI( Plus Directional Indicator) and –DI ( Minus Directional Indicator). ADX is calculated by taking the values of the DX divided by a specified period of time.

Interpretation of the ADX indicator 

Wilder, the brains behind the indicator says that a strong trend is present when ADX is more than 25 and it is not easy to decipher a trend when the value is less than 20. When the trend changes direction and starts going down, then this indicates that the trend is weakening and it is best to start considering closing your open positions. If the trend stays low for a long time but rises by 4 to 5 units, then this might be an indicator to open a trade position. The slope of the ADX line in the graph is directly related to the acceleration of the price movement of a security. If the price change is constant then the value of the ADX indicator flattens out.  More details on the ADX can be found at StockCharts.com Education school.

The way I use the indicator to identify some potential huge winners is to scan for stocks that had a huge move up, typically during earnings announcement (where the stock will gap-up 10-20%+ on good news). Then look at the ADX of all these stocks, you want to focus on the Companies that their ADX and +DI and -DI are relatively flat prior to the huge move up,. Then you would like to see the next few days where the ADX moves over 25 and the +DI to be relatively high and the -DI to be nearly 0 (which means that the stock is constantly going up, with rarely no pullbacks). An Example is Fastly ($FSLY) in the months between June and July, see the stock chart below with annotations. A good analogy is the ADX Is useful to identify stocks whose huge game-changing catalyst will catapult the stock for months to come.


Conclusion 

As mentioned in the introduction application of when the Corona Virus pandemic hit the stock markets by storm, the world as we knew it would change forever.  As a result, new technology leaders emerged, where these new companies started to return 5-10x their initial value prior to the Pandemic. If one was to be using the ADX Indicator they would have correctly identified the majority of these new technological leaders. 

If you are interested in learning more about other technical indicators with my style of trading take a look at The Art Of Mastering Japanese Candlesticks or an Introduction to the Relative String Indicator (RSI), or better yet my unique take on stock chart technical indicators


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