Identifying overbought and oversold levels with the ADX by TradersHelpDesk is as easy as monitoring the value of the ADX line. The ADX was originally developed by Welles Wilder to independently measure trend strength without regards to trend direction. The trend direction is actually incorporated into the ADX by utilizing the Directional Movement Index algorithm to determine if price is moving upwards or downwards. While the original ADX indicator consisted of three lines representing the DMI+, DMI-, and ADX, the TradersHelpDesk ADX indicator plots only the ADX line with histogram colors representing whether the DMI+ (blue) or DMI- (red) is dominant. This make it much easier for analyzing on the live edge of the markets. Since the ADX is a non-directional indicator, anytime the ADX is above the 70 line, then the market is either overbought (ADX line will be blue) or oversold (ADX line will be red).
Identifying Overbought and Oversold Levels with the ADX
For example, on the forty-five minute chart below, the ADX is red showing that the DMI- is dominant and goes above 70 (red line within the ADX subchart). This indicates that Crude is indeed oversold and the trader should wait for a retracement to the Average True Range Stop before entering. Additionally, between thes, you can also measure the divergence. Measuring from the first low where the ADX line was greater than 70 to the last low where the ADX line is greater than 70, there is clearly a lower high in the ADX indicating divergence. This identifies that the retracement should be stronger on the last pullback because not only is the ADX oversold but there is less strength for the market to continue down than the first low where the ADX was above 70. Click on the chart to expand the view.
Identifying overbought and oversold levels with the TradersHelpDesk ADX indicator is as clear as the line being above 70 and either being blue for overbought or red for oversold.