Trend Strength & Direction

📌 Assumptions of the "Trend Strength & Direction" Model

This model is designed to measure both trend strength and trend direction, using a modified version of the ADX (Average Directional Index) while also identifying ranging markets. Below is a detailed breakdown of all key assumptions.
1️⃣ Using ADX as the Basis for Trend Strength

Why ADX?
The ADX (Average Directional Index) is one of the most commonly used indicators for measuring trend strength, regardless of direction.
How is it calculated?
ATR (Average True Range) is used to normalize volatility.
Directional movement (+DM and -DM) is smoothed with an Exponential Moving Average (EMA) to obtain the +DI (Positive Directional Indicator) and -DI (Negative Directional Indicator).
Trend strength is derived by normalizing the absolute difference between +DI and -DI, divided by the sum of both.

🔹 Assumption: A high ADX means the trend is strong (whether bullish or bearish).
2️⃣ 50-Period Moving Average for Trend Strength

Why add a moving average?
ADX can be very volatile in the short term.
A 50-period SMA (Simple Moving Average) is used to smooth out trend strength and identify sustained trends.

🔹 Assumption: The SMA reduces false signals caused by short-term ADX spikes.
3️⃣ Identifying a Ranging Market (ADX Below 35)

How is a ranging market defined?
If the trend strength (ADX) is below 35, the market is considered "ranging".
The 35-level threshold is chosen empirically since ADX values below this level often indicate a lack of strong price direction.
When the market is ranging, the background color turns yellow.

🔹 Assumption: ADX < 35 indicates a sideways market, so the indicator colors the background yellow.
4️⃣ Determining Trend Direction Using +DI and -DI

How is direction determined?
If +DI > -DI, the trend is bullish (green).
If -DI > +DI, the trend is bearish (red).
If ADX is below 35, the market is ranging and turns yellow.

🔹 Assumption: Trend direction is determined by the relationship between +DI and -DI, not ADX values.
5️⃣ Background Color to Highlight Market Conditions

Yellow background if ADX < 35 → Ranging market.
Green background if ADX ≥ 35 and bullish.
Red background if ADX ≥ 35 and bearish.

🔹 Assumption: The background color visually differentiates trending vs. ranging phases.
6️⃣ Reference Levels for ADX

Lateral Threshold (35) → Below this, the trend is weak or ranging.
Neutral Threshold (50) → Intermediate level indicating moderate trend strength.
Strong Trend Threshold (75) → Above this, the trend is very strong and possibly overextended.

🔹 Assumption: ADX above 75 indicates a very strong trend, potentially near exhaustion.
🔹 Summary of Key Assumptions

1️⃣ ADX is the core strength metric → Strong trends when ADX > 35, weak below 35.
2️⃣ The 50-period SMA smooths out volatility → Prevents false signals.
3️⃣ Ranging markets are defined as ADX < 35 → Yellow background color.
4️⃣ Trend direction is based on +DI vs. -DI → Green = bullish, Red = bearish.
5️⃣ Background colors enhance readability → Helps distinguish different market phases.
6️⃣ ADX reference levels (35, 50, 75) indicate increasing trend strength.
Conclusion

This model combines ADX with a moving average and color-based logic to highlight trend strength, trend direction, and sideways markets. It helps traders quickly identify the best conditions for entering or exiting trades. 🚀