ATR and ADX Indicators Overview

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does a high value of ATR indicate about market conditions?

Consistent price movement

Probability of trend change (correct)

Low volatility in the market

Market entering a stable phase

How is the true range (TR) calculated when using the ATR method?

Yesterday Close – Today Close

Today High – Previous Low

Today Low – Previous High

Today High – Today Low (correct)

Which of the following statements about ADX is correct?

Values above 20 indicate strong market trends.

ADX values are not affected by market volatility.

Rising ADX values indicate that the market is strengthening. (correct)

A value above 60 is common in trending markets.

What is one major limitation of the ATR indicator?

It cannot be compared across different stocks. Signup and view all the answers

Why is the ADX considered an oscillator?

It defines the strength of a trend. Signup and view all the answers

What is the recommended period for calculating the EMA of ATR according to Wilder?

14 periods Signup and view all the answers

Which of the following indicators is integrated within the ADX?

Positive Directional Indicator (+DI) Signup and view all the answers

In context of ATR calculations, which method is used for an Outside day situation?

Current high is above the previous high, and current low is below the previous low. Signup and view all the answers

What does a Money Flow Index (MFI) value above 80 indicate?

Potential top and overbought market Signup and view all the answers

Which of the following is the formula for calculating the Money Flow Index (MFI)?

MFI = 100 * (Positive Money Flow / (Positive Money Flow + Negative Money Flow)) Signup and view all the answers

What trend does a Williams Percentage Range (W%R) value below -80 suggest?

The stock is oversold Signup and view all the answers

Which of the following calculations is correct for determining the Typical Price used in MFI?

Typical Price = (High + Low + Close) / 3 Signup and view all the answers

What does a W%R value above -20 indicate about the stock?

The stock is overbought and may decrease in price Signup and view all the answers

What does the term 'Positive Money' refer to in the context of the Money Flow Index?

When the current price is higher than the previous price Signup and view all the answers

Which of the following statements accurately describes the relationship between the Money Ratio and MFI?

A higher Money Ratio results in a lower MFI Signup and view all the answers

What does divergence between price and the Money Flow Index typically indicate?

Potential trend reversal or shift in momentum Signup and view all the answers

Study Notes

ATR - Average True Range

Developed by Welles Wilder (1978), creator of the RSI
Not a real indicator for entering positions, but part of some other indicators' calculations
Shows the average price range
High ATR value signifies high market volatility, and vice versa
High ATR values suggest a possible trend change

ATR Calculation

True Range (TR) is the highest value of these three calculations:
- Today's High - Today's Low
- Today's High - Previous Close
- Today's Low - Previous Close
ATR is calculated as a moving average of TR values.
Wilder recommends using a 14-period Exponential Moving Average (EMA).
Not useful for Stop Loss detection

ATR Method Selection

Method 1: Outside day - current high above previous high, and current low below previous low
Method 2 & 3: Used for other situations and gaps

ADX - Average Directional Index

Created by Welles Wilder
An oscillator used to determine trend strength
Range indicator from 0 to 100
Values below 20 indicate a weak trend
Values above 40 indicate a strong trend
Values above 60 are rare

ADX Calculation

ADX combines two other indicators:
- +DI: Represents growing upward trend strength
- -DI: Represents decreasing downward trend strength
Calculated as:
- +DI = +DM/TR
- -DI = -DM/TR
- DM = directional movement for a period

ADX Usage

An upward cross of 20 suggests a trend beginning
A downward cross of 40 suggests the end of a trend
Can be used to observe trend strength
- +DI Increase and -DI decrease = Upward trend
- -DI increase and +DI decrease = Downward trend
- +DI above -DI = Bullish traders dominate
- -DI above +DI = Bearish traders dominate

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the Average True Range (ATR) and Average Directional Index (ADX) indicators developed by Welles Wilder. This quiz covers their calculations, significance in market volatility, and methods for application. Perfect for those looking to deepen their understanding of technical analysis tools.