What Is the Best Trend Strength Indicator? ADX vs RSI
2 months ago forexsimulation Comments Off on What Is the Best Trend Strength Indicator? ADX vs RSI
ADX and RSI are two of the most familiar technical indicators in the forex market. Both of them can tell you trend strength. The fact that both technical indicators seem to do the same task attracts many questions.
For instance, what is unique about each of the two indicators? What is better between ADX and RSI?
Here, you will find out the answers to the above frequently asked questions about ADX and RSI. Reading this article will enable you to pick one or combine the two technical indicators in your future trades.
What is more? Read on to find out.
The Power of ADX
ADX is a technical indicator that is used to determine trend strength.
You could be wondering, “What is trend strength.” Trend strength is the effect of bulls and bears in the market. A bull is a market where prices are rising, whereas a bear market expects forex currency pair prices to keep falling.
The bulls and bears mainly occur due to market sentiment. That is, traders forecasting price falls and rises. The market follows the pattern since most traders’ actions influence the market demand and supply.
It would be best to remember that trend strength is not the same as trend direction when working with ADX. ADX line leans on the side of strength and not direction.
As an oscillator, it has a scale ranging between 0 and 100. A reading above 25 shows a trending market. A reading below 25, by contrast, signals a non-trending market.
However, the values may slightly differ with a market and trading time. That is why you should experiment with various readings before settling on a definite buy or sell point.
For this reason, ADX may continue rising during a market downtrend. Similarly, ADX will rise during market uptrends. This means that ADX tells you how strong the downtrend or uptrend is.
To capture uptrends and downtrends, you should introduce the positive directional indicator (+DI) and the negative directional indicator (-DI).
This gives you a chart of three lines — positive directional indictor, negative directional indicator, and the ADX line. Most charting platforms label the chart as DMI ADX. DMI stands for directional movement index.
The +DI is green while -DI is red. Although the ADX line never tells trend direction, the two directional indicators tell you where that trend points.
+DI above -DI means buyers control the market. Also, when the +DI is above -DI, and ADX line above 25 it means a strong trend.
Similarly, +DI below -DI means a sell trade.
When there is neither an upward nor downward trend, the +DI and -DI cross each other more often.
The relative Strength Index is one of the most popular trend and technical momentum indicators. It shows market weakness or strength depending on the most recent closing prices.
Like ADX, RSI has a scale ranging between 0 and 100. The scale helps you determine market overbuying and overselling.
A reading below 30 confirms that there is market overselling. On the other hand, readings above 70 prove market overbuying.
Apart from showing overbuying and overselling, RSI is crucial in determining an uptrend.
For instance, a reading between 50 and 70 means an uptrend is occurring. Likewise, a downtrend occurs when readings drop below 50.
Which Is Better between ADX and RSI?
ADX can be confusing if you use it without directional indicators. Its rising trait— in both uptrend and downtrend— confuses and scares away most traders.
Likewise, RSI starts giving false signals in a strong trending market. This happens because overselling and overbuying conditions can persist longer without reversing in such a market.
The weaknesses of both ADX and RSI mean that either tool is better depending on prevailing market conditions. So, here is how you should use the two technical indicators.
Use ADX to determine whether there is a trend. When there is no trend, stop relying on ADX. Then, it would be best to switch to other strategies such as RSI, resistance, and support levels.
Both ADX and RSI are crucial technical trend indicators. Since they manifest their powers according to prevailing conditions, it would help to use them concurrently.