Some of you may know of my struggle to learn about ADX. (Alevin! ... :laugh
One of my problems was that I use MACD a lot and I didn't want to get into a
multicollinearity issue. Well, I found something in my studies this morning that helped me clarify things in my own mind, so I thought I'd mention it in case anyone else is interested too.
This is an excerpt from "Technical Analysis, The Complete Resource for Financial Market Technicians" by Charles Kirkpatrick and Julie Dahlquist.
"...moving averages [are] only profitable in trending markets...oscillators are more profitable in trading markets.
The problem, then, is to be able to determine whether a particular market is trending or trading...
The most common solution is the use of Wilder's ADX in combination with an oscillator and a moving average...the ADX is a lagging indicator and should not be used for signals except from very low levels when a trend may be beginning." [Emphasis added.]
I don't know about you, but that clarified things for
me.
I already know that the MACD is more useful in a
trending market. So now I know when to use the MACD and when to use the ADX. And that avoids multicollinearity!
The book goes on to give some parameters.
"...When ADX is rising at at a level between 15 and 25, it is the beginning of trending; use trending indicators. Between 25 and 45, definite trending; use trending indicators. 45 and above, Overextended; watch for trend turning point; use price or indicator patterns. When ADX is declining and at a level below 20, low volatility; very short swings; no trend; use oscillators. Between 20 and 30, consolidation; use oscillators. Between 30 and 45, correction from extreme likely; use patterns; trending indicators."
For what it's worth. And thanks, Alevin, for another lesson in financial analysis!
Lady