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 the 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 your profit potential.
I have 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.
“The trend is your friend” is a common belief of traders, and that’s also why I always begin my own forex analysis by checking 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 of 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 does the ADX Indicator consist of?
- The ADX line itself,
- a + directional indicator (DI) line
- and a – DI line.
On the charts, the ADX line is usually white or black. (In my charts below I use a 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, and they are plotted in the same chart. There is a 3rd line, the ADX line, that’s a non-directional line but shows trend strength.
DMIs are built on the ratio of an exponential moving average of the Upwards Movement, Downwards Movement, and True Range.
How to use the ADX indicator
The reading of the ADX can be anywhere from zero to a hundred, therefore, it is 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 are also wondering 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
Another example is the GBPUSD which has an extremely strong trend direction, and if you had taken this trade from where the crossover happens, you would be making lots of pips until the next crossover happens.
Of course, the buying pressure is in green and the selling pressure is in red, and so with all three of these lines on here, you have the other line, telling you how strong the trend direction is and the green and red lines indicating the trend direction. As I mentioned earlier when you have the plus di line, the green line crossing above the red di line, that di line could be used as a buy signal or long signal.
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 of the indication here or the suggestion, this does not work, 100 % of the time.
Because these are “time-lapsed” indicators none of these indicators work 100 % of the time. However, the cross above could be an indication that the trend direction is turning and it certainly worked here.
What you have to keep in mind with all indicators is that they are only an indication – a possibility and just one of the tools in your arsenal of strategies to use in determining the direction of your trade.
Have a look at two great opportunities at the EURGBP chart:
ADX indicator EURGBP
In this case, it’s a daily forex chart, and this might be used for swing trading rather than for intraday trading. It’s very unusual to see an indicator where clearly the trend direction is down and yet the ADX line is going up and conversely the ADX line is going up, but the trend direction is going down.
Herewith the EURGBP chart we have two great opportunities to make some great pips! First, we have a 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 is 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 in the opposite direction, as shown here.
ADX indicator EURUSD
In the EURUSD chart, the trends are going in the opposite direction. It can go either way because it’s not telling you the direction it is intending to go in.
It is only telling you the strength of the trend – and we can see during the big correction the trend was getting stronger and stronger upwards. There was a pickup in the strength of the trend, indicated here.
It started to go back down quite fast and then gradually, it started to pick up strength, with the ADX line going up.
If you want to also include a trend, direction indicator, or if you want to add something that will tell you the direction, not just the strength, you can add a positive directional movement line or plus di, which indicates the amount of buying pressure.
You can also add a negative directional movement line or negative di, which indicates the amount of selling pressure.
ADX indicator USDCHF
Now you have your plus di and your minus di. 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.
Believe it or not, but here on the USDCHF chart, there are 3 great opportunities thanks to the ADX indicator! First, we have a strong bearish trend followed by a more moderate bullish trend, before another bearish trend that just has begun.
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, so that might be confusing until we take a good look at it.
The ADX line is 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 slower, although it is moving in a bullish pattern.
You can have the ADX with the plus di and the minus di lines on there but notice that the plus di line, which indicates how much buying pressure there is in play, is in green here.
Besides the green line, there is also the di line here, which is in red and indicates how much selling pressure there is. 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.
You can see where the crossover happened and there was a lot of upside in the middle. The ADX indicates 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 (An extremum (or extreme value) of a function is a point at which a maximum or minimum value of the function is obtained in some interval). It is used 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.
I find the best way to use my ADX Indicator on Forex is to watch it perform for a few days before using it on a live trade. I watch the rhythm of it on one particular currency. How fast does the ADX move when a trade changes direction, when does it move? I will go from the 1 min to the monthly time frames several times to see the progression of it changing. In my demo account and when I have the ADX showing a strong buy or sell signal from the 1 min to the daily, I will then consult my Fibs, trend lines, daily or 4 hour charts to see if all these line up with what the ADX value is giving me as far as trend strength goes. Then I will place my trade in the 15 min or 1 hour time frame depending on where I think the trend is going to go. When I feel confident with the ADX, I will then try this on my live account. Using the strength of a trend gives me the direction the trade will go. The ADX line will show me when the trend strength becomes a weak trend and alert me to a trend direction change.
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 used for all kinds of currency pairs.
Again, it is not telling you whether it is, trending up or down, just how strong that trend is at this moment. People sometimes ask whether these indicators can be used for stocks or only for Forex. This is one of those indicators that can be used on almost all charts!
People also ask whether ADX can be used for day trading and swing trading. Again, you have to make your own decisions, but I believe it can be used for either one because it is, really just telling you how strong the trend is and like many indicators it adjusts to the timeframe.
If you want to use it for stocks, commodities, cryptocurrencies, I believe you can use it for 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 where you can get the ADX indicator? Well, you can go to your trading platform and their own charting software. Look for the ADX or Average Directional Index in the menu of indicators, 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 4 or 5, you can go to the menu, and choose “Template”, and then “ADX”.
- Click “Insert” and move your mouse over “Indicators and Trends”
- 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.
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