Hence we combine this with the ADX to reduce these whipsaws.

The ADX is the integral part of this system, as it gives a warning for a market about to change direction. It gives precise interpretations of the price action as follows:

• It tells you if there is a trend present or not.
• It also informs you if it is early or late in a trend.
• It informs of a de-trending, of a reversal and renewal.
• If the ADX line is trading above 20, then the market is in a trend.
• If the ADX line is below 20, it means the trend is not a strong one.
• As long as the ADX line is above 20, you should still consider a trend to be in effect.

The ADX however does not indicate the direction of the trend, only the strength of the trend.

Once we have these basics clear, let us add some filters to these indicators, which will enhance the characteristics.

Now in our chart here, we have the red line as the minus DI, the blue line as the plus DI, and the green line is the ADX. I have drawn a line at the 20 level for the ADX, since the rise of the ADX above 20 signifies an emerging of a trend.

Overall, if we observe only the two DMI lines (the blue and the red) it does give a correct picture of the trend, and keeps us in the correct side of the market.

Simply put, at the area marked with the red line, the DMI line, is above the +DMI line, signifying a downtrend.

And at the area marked with the blue line, the +DMI line is above the DMI line, signifying an uptrend.

But what about the areas, where the DMI lines have frequent crossings?

This is the kind of situation which will whipsaw out any position and this where the ADX is used in tandem. For these kinds of situations we define certain parameters, which will help us make a correct decision.