Average Directional Index (ADX)

After two volume-based indicators, we move on to our first trend-based indicator i.e. Average Directional Index (ADX). As the name suggests, the key technical measure here is the direction/trend of the asset. It is represented using,

• Positive directional indicator or +DI — when the trend is upward,
• Negative directional indicator or -DI — when the downtrend is taking place.

ADX with its accompanying two indicators measures the strength of the current trend of the asset. Based on this strength, traders/investors can place their bets on whether to long or short the asset.
While calculating ADX, the time period is generally divided into 14 bars. However, ADX can also be plotted for shorter timelines like 7 bars or longer ones like 30 bars. While the former makes the ADX line too volatile, the latter is time-intensive, thereby making it unreliable to use while placing trades.
The calculations for ADX are truly complex. But, to save you efforts, TradingView has a built-in ADX indicator. It can be used for a variety of assets like ETFs, futures, stocks, and crypto.
Now, when you use the ADX indicator, the final value i.e. the ADX value is the only priority. The ADX indicator is displayed as a line built from values ranging from 0 to 100. Also, the general interpretation of the values is as follows:

Starting off, ADX values below 25 are a phase of large-scale accumulation and/or distribution. In this phase, the market is in a confused state with regard to the asset. From 25 to 50, not only is there a presence of the trend, but also a confirmation. Here, the market is trying to find the potential support and resistance levels of the asset.
Above 50, it is an indicator of a strong trend with regards to its longevity. Here, the asset reaches extreme price points in its direction. This is a sign of caution as ADX > 50 means investors who are longing are about to book profits while many even place ‘short trades’.
ADX is a trend-based indicator, hence, using it alone is a risky proposition. In conjunction with price movement indicators, like moving averages or support and resistance, ADX can make you a better trend trader.
Example

Bitcoin’s ADX levels remained above 30 for the majority of the timeframe while also touching 60 at times. This didn’t reflect in the price levels of Bitcoin. However, as we zoom out from the chart, the price has rallied higher as the trend gained strength and momentum.

Aroon Indicator

Developed by a stock market expert, Tushar Chande, the Aroon Indicator is a popular trend-based indicator. Similar to ADX, this helps in identifying trends and also measuring the strength of the trend. The Aroon Indicator is composed of two Aroon lines i.e. the AroonUp and the AroonDown. Both these lines are measured on a scale from 0 to 100.

• What Is the AroonUp Line?

This line measures the strength of the asset’s uptrend by reflecting the number of days since the asset price reached its previous 25-day high. This means if the asset is at its 25-day high currently, the AroonUp value is 100. Likewise, the lower the AroonUp value, the weaker the uptrend is.
It is calculated using this formula — [(number of periods) – (number of periods since highest high)] / (number of periods)] x 100

• What Is the AroonDown Line?

This line reflects the number of days since the asset price reached its recent 25-day low while also confirming the bearish sentiments in the market. Similar to AroonUp, the closer the AroonDown value is to 100, the stronger the sentiment.
To calculate AroonDown line — [(number of periods) – (number of periods since lowest low)] / (number of periods)] x 100

How to Interpret the Aroon Indicator?

• If the AroonUp is in the range of 70 to 100 while AroonDown is between 0 to 30, it signifies a bullish market with newer highs expected for the asset.
• If the AroonUp stays in the range of 0 to 30 while AroonDown is increasing, the bearish sentiment prevails in the market with the asset hitting low prices consistently.
• AroonUp and AroonDown remain fairly parallel when the asset at a specific price point is consolidating.

Example 1

Both the Aroon Lines move parallel to each other indicating the price consolidation of Bitcoin in the given timeframe.
Example 2

Two observations here: In the former (left), we can see how AroonDown rising above AroonUp indicating a price downtrend. Likewise, the price falls.
In the latter (right), AroonUp broke an extended AroonDown indicating a bullish reversal. After the break, the AroonUp value stayed near 100 reflecting the strength of the uptrend. The prices reflected the sentiment by reaching new highs.