Identifying Strong Markets with ADX and RS Indicators 

Content Details 

Summary: This article explains how to identify strong markets using the 14-day Average Directional Index (ADX) and Relative Strength (RS) readings. It covers the importance of these indicators, how to interpret their values, and practical tips for selecting markets based on high ADX or RS readings. 

Target Audience: Intermediate to advanced traders who are familiar with technical indicators and are looking to enhance their market selection process for better trading opportunities. 

Expanded Response 

Quote: "Identify a market whose 14-day ADX is greater than 30. The higher the ADX, the better. If you are not using ADX, the RS reading must be at 95 or higher." 

Expanded Response: 

Definition: The Average Directional Index (ADX) is a technical indicator used to quantify the strength of a trend. A 14-day ADX value greater than 30 indicates a strong trend. Relative Strength (RS) measures a stock's price performance compared to other stocks. An RS reading of 95 or higher indicates a stock performing better than 95% of the market. 

Stages: 

Calculating ADX: Use a charting platform to calculate the 14-day ADX for a given market. Ensure the ADX value is above 30 to confirm a strong trend. 

Calculating RS: If not using ADX, calculate the RS reading to ensure it is at 95 or higher, indicating strong relative performance. 

Market Selection: Identify and select markets with ADX above 30 or RS at 95 or higher for potential trading opportunities. 

Example in SPX: As of now, the current price of SPX is 4400. Suppose the 14-day ADX for SPX is 35, indicating a strong trend. Alternatively, if using RS, the SPX has an RS reading of 97, confirming strong performance relative to the market. 

Practical Application: Traders should use ADX and RS readings to filter and select markets with strong trends or relative performance. This helps in focusing on markets with higher potential for profitable trades. 

Trading Strategy: 

Trend Following: Use high ADX values to identify and trade in the direction of strong trends. Enter long positions in strong uptrends and short positions in strong downtrends. 

Relative Strength Trading: Use high RS readings to select stocks outperforming the market. Focus on long positions in stocks with RS readings of 95 or higher. 

Risks: 

False Signals: High ADX or RS readings may sometimes give false signals in volatile or choppy markets. 

Market Reversals: Strong trends or high relative performance may reverse suddenly, leading to potential losses. 

Indicators for Identifying Strong Markets: 

ADX Indicator: Use the 14-day ADX to quantify trend strength. Values above 30 indicate strong trends. 

Relative Strength (RS): Use RS readings to compare stock performance relative to the market. Readings of 95 or higher indicate strong performance.