- What each of the three computes and its one legitimate use
- Why ADX is a regime detector rather than a direction indicator
- Why ATR is the most practically useful indicator in this module
MACD — the difference between two averages
- Above/below zero tells you which average is on top — a slow, lagging trend statement.
- Crossovers of the signal line are the standard entry trigger, and are late by construction — they are derived from averages that are themselves late.
- The histogram's direction is the most useful part: it shows momentum accelerating or decaying before the crossover happens.
- Divergence on MACD carries the same caveats as RSI divergence — read the previous lesson rather than treating it as a separate signal.
MACD is a trend-following construction. In a sideways market the fast and slow averages cross repeatedly around zero, generating a stream of signals in both directions, most of which lose money.
This is not a defect to be tuned away — it is what a trend indicator does in the absence of a trend. Which is exactly the problem ADX exists to solve.
ADX — is there a trend at all?
The average directional index measures trend strength without regard to direction. A rising ADX means the market is trending; whether up or down is a separate question answered by price.
- Below 20Regime: No trendImplication: Trend-following tools will whipsaw. Range tactics, or stand aside.
- 20–25Regime: Trend possibly emergingImplication: Watch. Breakouts from here are more likely to run.
- Above 25, risingRegime: Trend in forceImplication: Trend-following tools are appropriate; mean-reversion is dangerous
- Above 40Regime: Very strong trendImplication: Powerful, but also extended — new entries are poorly placed
- Falling from a high levelRegime: Trend losing forceImplication: Not a reversal signal — the trend may simply be resting
ATR — the one that changes what you risk
ATR is the only indicator here that should change the size of your position. It answers a question no chart pattern can: how far does this instrument normally move, and therefore how far away must a stop sit to avoid being hit by ordinary noise?
You are willing to risk ₹20,000 on a trade. The two instruments require completely different position sizes.
- Stock A — price
- ₹840
- Stock A — ATR(14)
- ₹141.7% daily
- Stock B — price
- ₹840
- Stock B — ATR(14)
- ₹526.2% daily
- ATR-based stops — placing a stop 2–3 ATR from entry means it sits beyond ordinary daily noise. A stop inside 1 ATR will be hit by a normal session.
- Chandelier / trailing stops — trail a stop at a multiple of ATR below the highest close since entry, so the stop widens in volatile conditions and tightens in quiet ones.
- ATR percentile — where does current ATR sit against this stock's own history? Low percentile means volatility contraction, which as the price action lesson showed, tends to precede expansion.
- Position sizing — described above, and the reason ATR earns its place ahead of every other indicator in this module.
Six indicators on one chart feels rigorous and is the opposite. Nearly all of them are derived from the same closes, so they are highly correlated — three momentum oscillators agreeing is one observation reported three times, not three confirmations.
The practical consequence is worse than redundancy: with enough indicators, at any moment some of them support whatever you already want to do. A defensible setup uses one trend measure, one volatility measure, and price. If you cannot state what each line on your chart adds that the others don't, remove it.
- ☐Price and volume — the primary data.
- ☐One long moving average for regime (200-day or 30-week).
- ☐ATR, for stop distance and position size.
- ☐Optionally one momentum oscillator, used for context rather than triggers.
- ☐Optionally ADX, to know which family of tactics applies.
- ☐Nothing else, until you can state precisely what it adds.
In one screen
- 1MACD is the gap between two averages — its histogram is more informative than its crossovers.
- 2ADX measures whether a trend exists, not its direction; it's a regime switch.
- 3ATR measures typical movement including gaps, and should drive stop distance and position size.
- 4Volatility-adjusted sizing equalises risk across instruments and is the highest-value idea here.
- 5Stacked indicators are correlated, not confirming — a minimal toolkit is a feature.
Check yourself
Nothing is scored or stored — the explanation after each answer is the point.
Two stocks trade at ₹500. One has an ATR of ₹8, the other ₹34. You risk a fixed rupee amount per trade. What should differ?
ADX is reading 14 and has been below 20 for two months. What does that imply for a moving-average crossover strategy?