The ADX indicator is one of my favorite indicators. Today I will show you 9 real examples from my updated currency pair charts how to use ADX in your forex trading.
We all know that trading in the direction of a strong trend reduces risk. Trading in the right direction increases also your profit potential for sure.
I have got something important for you today. It is the ADX or average directional index indicator. Let me tell you about it. Adx is not a trend direction indicator; it is only a trend strength indicator. It tells you how strongly the price is moving in one direction, but not what that direction is, in other words, doesn’t tell you whether the price is moving up or down.
“Trend is your friend” is a common belief of traders, and that’s also why I always begin my own forex analysis checking out the adx indicator, and how it looks on several time frames. A trader gains the most from trading the strongest trends. With The ADX indicator you make the job finding the trend strength much easier. It allows us to see the bulls and bears at the same time. It also tells us when the trend is about to reverse.
What consists the ADX indicator of?
- The ADX line itself,
- a + directional indicator (DI) line
- and a – DI line.
On charts, the ADX line is usually white or black. (In my charts below I use purple color)
The +DI line is green and the –DI line is red, but you can customize these colors based on your preferences. The ADX ranges from zero to 100.
DMIs are 2 different indicators, one negative and one positive, they are plotted in the same chart. There is a 3rd line, the ADX line, that’s non directional but shows trend strenght.
DMIs are built on the ratio of exponential moving average of the Upwards movement, Downwards movement and True Range.
How to use ADX indicator
Now the reading of the ADX can be anywhere from zero to a hundred, so it’s, an oscillator, it bounces between 0 and 100. Anything below 25 suggests that there isn’t much of a strong trend, while anything over 75 suggests an extremely strong trend. If you are new to forex, maybe you also wonder what an oscillator is. An oscillator is a technical analysis tool that constructs high- and low – bands between two extreme values, and then builds a trend indicator that fluctuates within these bounds. Traders use the trend indicator to discover short-term overbought or oversold conditions.
The strength of the ADX indicator
- 25 to 50 is a somewhat strong trend.
- 50 to 75, a very strong trend
- and 75 to 100 would suggest an extremely strong trend.
If the ADX value is 25 or less, that would be an absent or a weak trend. So let’s take a look at the GBPUSD chart.
ADX indicator GBPUSD
So let’s take a look at another example. GBPUSD have an extremely strong trend, and if you had taken his trade from where the crossover happens, you would be making lots of pips until the next crossover happens.
Of course, the buying pressure in green and the selling pressure in red, and so with all three of these lines on here, you have the other line, telling how strong the trend is and the the green and red lines indicating the direction of the trend, and, as I mentioned earlier when you have the plus di line, the green line crossing above the red di line, that di line that could be used as a buy signal.
If you want to and then when it crosses back below which it looks like it’s about to do here, that could be a sell signal or even a possible short signal, because the indication here, the suggestion and by the way this does not Work, 100 % of the time all right, and none of these indicators work 100 % of the time as far as I know, but the cross above could be an indication that the trend is turning and it certainly worked here.
Have a look at two great opportunities at the EURGBP chart:
ADX indicator EURGBP
So, in this case, it’s, a daily forex chart, and so this might be used for swing trading rather than for intraday trading, and it’s very unusual to see an indicator where clearly the trend is down and yet the line is going up and then clearly the line is going up, but the trend is going down.
Here at the EURGBP chart we have two great opportunities to make some great pips! First we have stable bullish trend from the first crossover, and this trend continues all the way to the top of the chart. There is another even quicker opportunity later on. The bearish trend is very strong, and we could keep the trade until another crossover at the very bottom.
It’s, a little strange looking and you might have to get used to it. But again it’s possible for these two to either go in the same direction or for them to go on opposite directions, like here.
ADX indicator EURUSD
Here at the EURUSD chart, the trends are going in the opposite directions. It can go either way because it’s, not telling you the direction it’s. Only telling you that the strength of the trend – and we can see during the big correction, the trend was getting stronger and stronger upwards, and so there was a pickup in strength of the trend, as you can see here indicated here, And then over here again, you know it started to go back down quite fast and gradually, and that started to pick up strength, as you can see over here with the ADX line going up over here.
Okay, now, if you want to also include a trend, direction indicator okay, so if you want to add something that will tell you the direction, not just the strength, you can add something. You can add a positive directional movement line or plus di, which indicates the amount of buying pressure, and you can add, also a negative directional movement line or negative di, which indicates the amount of selling pressure.
ADX indicator USDCHF
So you got your plus di and your minus di. So a plus di line above the di line, means that there is more upward movement than downward movement and, conversely, a plus di line below the di line means that there is more downward movement than upward movement.
Belive it or not, but here at the USDCHF chart, there are 3 great opportunities! First, we have a bearish, strong trend, followed by a bullish more moderate trend, before another bearish trend that just has begun.
Now some traders will use the plus di line crossing above the di line as a buy signal, and they might also use the plus di line crossing below the di line as a sell signal alright, so that might be confusing until we look at it alright.
The same chart here and the same ADX line. Remember back here. Okay, you’ve got the ADX line in purple here.
ADX indicator USDJPY
USDJPY is in a strong bearish trend here, and the ADX works as a fantastic indicator for this currency pair. After crossing, the trend is more slow, although it is moving in bullish pattern.
You can have the ADX with the plus di and the minus di lines on there. So yeah same line here, but notice that the plus di line, which indicates how much buying pressure there is that’s in green here.
That’s, the green line and there’s. Also. The di line here, which is in red and that indicates how much selling pressure there is and notice that the plus and minus di lines move opposite to each other.
ADX indicator AUDCAD
AUDCAD has a strong bearish trend, and the ADX shows a great buy signal here. After consolidating for a while, there is another bullish trend at the very end of this chart, although this is a much minor trend than the first one.
ADX indicator CADCHF
There are 2 strong bearish trends on this CADCHF chart. While it actually retraces, there is another quick bullish trend that is also possible to take advantage of for those that just are looking for a quick trade. I mean the crossover happened here and it was lots of upside in the middle. The ADX indicate a reversal in the trend, and you can easily jump before the next crossover.
ADX indicator GBPJPY
ADX indicator EURJPY
When should I use the ADX indicator?
The point of extremum is used then as the market entry level. Thus, after the signal to buy (+DI is higher than -DI) one must wait till the price has exceeded the point of extremum, and only then buy. However, if the price fails to exceed the level of the point of extremum, one should retain the short position.
Which Settings Are Best for ADX?
The most common settings for ADX usually are a 14-period length together with a high volatility threshold at 25, and a low volatility threshold at 20. In other words, a market is thought to be volatile when ADX is above 25, and calm when it’s below 20.
Which instruments can use the ADX indicator?
You can use it on any time frame on any asset class. The ADX indicator can be use for all kind of currency pairs. Again, it’s, not telling you whether it’s, trending up or down, just how strong that trend is now. People sometimes ask me whether these indicators can be used for stocks or only for Forex. This is one of those indicators that can be used on mostly all charts!
People ask me whether it can be used for day trading swing trading. Again, you have to make your own decisions, but I believe it can be used for either one because it’s, really just telling you how strong the trend is and like many indicators it adjusts to the timeframe.
I believe you can, if you want to use it for stocks, commodities, crypto currencies, pretty much whatever you like, whatever asset class you feel like using, but use your own discretion make your own decisions. Always be responsible for your own trading.
Where can I get the ADX indicator?
Are you looking for the ADX indicator? Well, I can’t, send it to you, but you can go to stockcharts.com or whatever your trading platform is and look for the ADX or average directional index. And if you want to throw on the plus di minus di lines, you can certainly do that, that’s optional.
If you use Metatrader, you can go to the menu, and choose Template, and then ADX.
- Click Insert and move your mouse over Indicators and Trend
- Click Average Directional Movement Index
History of the ADX indicator
The ADX system was developed by J. Welles Welder in 1978 and further study was done by Dr Charles Schaap. Further studies have been done by Chuck LeBeau and Ken Calhoun.
Was this article helpful?
I hope this was helpful to you. If you like my article, if it’s helpful, if you want to read more articles like this, then please share it on Facebook and leave a comment. If you want to, let me know what you think of the average directional index and if you have not subscribed to my Youtube channel, why not do that right now, okay, and also hit that notification bell on youtube, so you can get an update whenever new videos are published.
Also if you’re interested in trading in help or coaching for your trading or investing or if you want some help, putting together your own trading or investing plan, you can contact me.