Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Technical Analyst for City Index. Welcome to another lesson in technical analysis and chart reading. As always, remember these are simply for information and educational purposes only.

Today we're going to continue looking at the ADX indicator. We've had some fairly good reviews back on how it is used as particular indicators, so I want to delve into a little bit more of the pros and cons about using indicators today.

So we'll take a look at the ADX along with the moving average and see if we can fine tune this to give us some better strategies.

Also, I want to look for the disadvantages and advantages as I said, but also the dual confirmation from both the ADX and the moving average and I also want to indicate how we should be observing price behaviour at certain parts of moves in the markets.

Now we'll start by taking a look at crude oil. This is a weekly chart. Now you'll remember from the previous lessons that I like the ADX indicator to be above 20. Notice also that we have the moving average and this is a 20 week moving average on the chart. So we saw a high at $144 before crude oil started its decent towards the downside. So what information did we actually have there?

Well as soon as crude oil dipped below the 20 week moving average, what was the position of the ADX? Well this is where it gets really interesting because the move down had been quite sharp, but if you look at the ADX indicator, that was tapering off. In other words, it was slowing down. But it was still above the 20 line which was suggesting that it's a positive move for the ADX indicator but negative for crude oil.

Now recently, crude oil has been struggling to gain any upside momentum. We've noticed several things actually. The commodity has been moving sideways. Straight away you should notice that at the $89 mark we've had almost like a triple top. There has been several attempts - on the weekly chart we would notice it or we would refer to this as a triple top, but on a daily chart there has been multiple attempts.

But what about the ADX, what information has that been giving? Well actually, straight away we can see that it is below the 20 level, so it's telling us that the trend itself is quite weak and that's why we've got this sideways market. As you can see, there is no real underlying trend there. It's just really trading between a channel of highs and lows.

At the moment though the ADX is starting to appear as if it is going to move above the 20 line. So if we start seeing prices move towards the upside and get above the 20 week moving average, with the ADX above 20, there's a possibility that we might start seeing higher prices in crude oil.

On the flipside though, if we start falling towards the downside and if the ADX moves above the 20 line, there could be a move sharply towards the downside.

Now here we're taking a look at gold and again, this is the weekly chart. I'd like to draw your attention to two areas. The first is between the two vertical lines and you'll notice that gold rallied, but what about the ADX indicator? What actually happened to that?

You can see that the ADX indicator was trading below its 20 line and that was suggesting that the move was quite weak. Well actually, from a price perspective, it was actually a good strong move. So the ADX indicator was failing to pick up on this.

So we need to pay attention sometimes that it's not just the indicator that's going to provide the lead; it's the market itself and here we really do need to pay attention to the price of gold, not necessarily the moving average or the ADX indicator. So as I said previously, price is king. It rules. It basically moves first and the indicators will then follow.

Now after the second vertical line, what happened at that point there? Well, the ADX indicator had risen above the 20 line and prices still continued to move towards the upside. Now the difference here being between these two sides here is the behaviour of price.

Between the first two vertical lines there were good moves towards the upside, but the price range was quite narrow. After the second vertical line, we had wider price bars. In other words, price was moving, there was a wider price range between the highs and lows and therefore, the move was also similarly to the previous one but quite strong.

So what you really do need to pay attention to first is price. Second, followed by the indicators whether you're going to be looking at the moving average or the ADX. Now of course, in previous lessons, I've told you how you can utilise the moving average, so it's worthwhile revisiting those lessons.

In this example here we have the FTSE 100 daily chart. Now there are some arrows that I've put onto this particular chart here. After the low of 5,033, notice that the FTSE had climbed above its 20 day moving average. The ADX was still above 20 indicating that the move should be sufficient enough to get towards the upside.

Now the second blue arrow indicates when we had a dip below the 20 ADX line and then climbed back above there and as you can see, FTSE steadily moved towards the upside making a high at 5,833.

Now at that point the market had then closed below its 20 day moving average indicating that there might be a reversal. As you can see, the FTSE dropped quite sharply down towards the 4,898 level, but what else do we observe? Notice that there is a rise in the ADX indicator and that was suggesting that the move towards the downside was a fairly strong one. So as you can see here, that was quite a nice set up and it worked very well as opposed to a previous chart we had a mixed signal there.

So it's worthwhile paying attention to these indicators, but it's also worth noting that they're not the be all and end all. You don't really want to rely on an indicator 100 percent of the time. They're simply tools and that's all they're going to do for you. They're going to give you some added confirmation at certain times and at certain times they will fail.

So in conclusion, please pay attention to some of the following points here. We want to notice if the ADX reading is above or below 20. If it's above 20 it's suggesting that the move, or the trend, should be fairly strong. If it's below 20, it's suggesting that the move, or the trend, could be weak.

Also, is the market trading above or below the 20 period moving average? In other words, are we trading towards the upside or towards the downside? What is the overall trend of prices?

Then of course you want to pay attention to support and resistance levels. In a previous lesson I've talked about psychological round numbers. Are we heading towards a psychological round number in resistance or support because that may have an impact on the current move as well?

Then of course, pay attention to the behaviour of prices. Are the price bars narrow or are they expanding because that will suggest that prices are moving in a greater trend move than a narrow trend move?

In the next lesson we'll talk about ADX along with another indicator. In the meantime, have a great trading week. This is Sandy Jadeja.