The Average Directional Movement Index or “ADX” indicator is a member of the Trend family of technical indicators. Welles Wilder created the ADX in 1978 to complement his other creative efforts in technical analysis by measuring the strength of trend forces. Traders use the index to determine if a trend will extend or gradually lose its strength; valuable information when setting entry and exit levels in the forex market.

The +DI line crosses above the −DI line, confirming bullish momentum. You decide to enter a long position and set your stop-loss below the recent support level. As the trend continues, the ADX peaks at 50 before gradually declining, signaling it’s time to lock in profits and exit the trade. As with most other technical analysis tools, the average directional index, too, comes with its own set of unique advantages and disadvantages.

As ADX does not perform well during market consolidation, it would take a lot of time to go below that line and inform the trader that it is not a good time to trade. That is why traders take many losses with ADX alone when the market goes sideways. The ATR value can range from low to high values, with higher ATR values indicating higher volatility and lower ATR values signaling lower volatility. The calculation of the ADX requires considering the price changes between the high and low levels of a financial instrument. The core components of this process are +DI (Positive Directional Indicator), -DI (Negative Directional Indicator), and True Range (TR).

Identifying Breakouts: ADX with Range Breakout

The slope of the ADX line, or its rate of change, further helps traders gauge the strength of the prevailing trend. A steeper slope indicates a rapid increase in trend strength, while a flatter slope may suggest a weaker trend or a potential slowdown. The ADX Indicator, short for Average Directional Index, is a powerful tool in Forex adx technical analysis used to measure the strength and direction of market trends. It helps traders make informed decisions in both trending and range-bound markets. In trading, market participants use two contrasting types of analysis.

In order to gauge the direction of the trend, we also need to look at the actual price action. Now, let’s see how you can effectively trade with the best ADX strategy. You will learn how to make profits by applying the ADX indicator trading rules.

Step 2: Calculate the Average True Range (ATR)

• We will take profit after the ADX indicator breaks back below 25, which tells us that the strength of the prevailing trend is decreasing.
• If the ADX indicator moves between 30 and 50, it means there’s strong trend.
• Wilder developed the Average Directional Index (ADX) as an indicator for the interpretation of the market environment.
• If you are looking for something specific, you can always head to the TSG Blog for tons of great trading content.

The Alligator is a versatile basic indicator with a simple yet effective calculation formula. Trade theory suggests adding trend tools to the oscillator – for example, a moving average or a combination of ADX and EMA. It is a set of MAs with different periods that show four stages of a trend – beginning, active phase, weakening trend, and flat.

How to Use the ADX Indicator in Forex Trading

“A” through “F” annotations illustrate those regions on the candlesticks. The divergence noted suggests a patient holding strategy, as well. The ADX can also be classified as an oscillator since the various curves within the indicator box fluctuate between zero and 100. The “signal” line of the indicator rarely goes above 60, but values below 25 indicate a weak trend, and values from 25 to 50 suggest a strong one.

Directional movement indicator crossovers can be used to estimate the performance of a security and predict coming changes in a trend, such as reversals or breakouts. The chart below shows the average directional index indicating an increasingly strong uptrend as average directional index readings rise from below 10 to nearly 50. The lines are the ADX (trend strength), +DI (bullish direction), and -DI (bearish direction).

How To Use the ADX for Forex Day Trading

• It’s a good way to gain experience without exposing to a high risk of losing money rapidly.
• Recognizing the market trends is the primary strength of the ADX, which has a lasting impact on the choice of other analysis tools.
• The ADX Indicator is widely used for measuring trend strength, but like any tool, it has advantages and limitations.
• It can be used in various markets, including stocks, commodities, and cryptocurrencies, in addition to forex.
• Moreover, the ADX indicator alone won’t supply enough data to be used on its own and can provide false signals when used on shorter periods.
• Therefore, constant backtesting and adjustments based on recent market conditions are essential.

We also know from the natural ebb and flow of the market that prices move from periods of consolidation to trending and vice versa. For various chart timeframes, including 1 minute, 5 minutes, 15 minutes, and 1 hour, ADX settings can significantly influence the accuracy of trading signals. It’s crucial to understand that there’s no one-size-fits-all when it comes to these settings.

Confident in the direction and strength of the trend, the trader chooses to hold the position. Breakouts are not hard to spot, but they often fail and end up being a trap. When it rises from below 20 to above 25, for example, a strong trend has been established and is likely to be sustained.

Example 3: Weak or Sideways Market

Traders view ADX above 25 as a reliable indicator of a solid trend. The ADX is not used in isolation but rather in conjunction with the +DI and –DI lines. When the +DI crosses above the –DI, it is considered a bullish signal, especially if the ADX is above 25, indicating a strong upward trend. Conversely, a bearish signal is generated when the –DI crosses above the +DI under similar conditions.

Featured on the MT5 brokers list, Opofinance offers a robust social trading service, allowing you to follow and replicate the strategies of successful traders effortlessly. With safe and convenient deposit and withdrawal methods, Opofinance ensures that your trading experience is seamless and secure. Imagine accessing a platform where your trading strategies are supported by top-tier security and exceptional customer service. Join Opofinance today and take advantage of their cutting-edge trading platforms and exceptional customer support to enhance your forex trading journey. While the default setting for ADX is 14 periods, adjusting this can better suit different trading styles. Shorter periods (e.g., 7) make the ADX more sensitive, capturing trends earlier but possibly increasing false signals.

Which is Better: RSI or ADX?

The Average Directional Index (ADX) is a technical indicator used in the field of forex trading to assess the strength and potential trend of a currency pair. Welles Wilder, the ADX is part of a broader set of indicators known as the Directional Movement Index (DMI). The primary objective of the ADX is to try helping traders identify whether a currency pair is trending or consolidating. The ADX is also useful for identifying price ranges when used in conjunction with support and resistance levels. The chart above displays a daily view of the US Dollar/Japanese Yen (USD/JPY) forex pair, where two distinct trading ranges are visible.

For instance, during an uptrend with a strong ADX reading, traders might look for opportunities to buy near a 50% Fibonacci retracement level. Traders often use these levels as benchmarks to decide whether to engage in trend-following strategies or avoid trading during periods of market indecision. Trading in financial instruments carries with it inherent risks, including the risk of losing the entirety of your investment. If you are a fan of the ADX indicator, then you might want to take a look at the free ADX EA that I have developed. It can automatically analyse charts for buy and sell signals based on various ADX trading strategies.