The ADX indicator is an indicator of directional movement. Its main purpose is to assess the trend momentum. It is also known among traders as the Average Directional Index. The technical analysis tool allows you to determine the strength of the movement and evaluate how strong the momentum of the “bulls” or “bears” is. ADX is already integrated into the base trading platforms MT4 and MT5.
What does the indicator look like?
If you set the indicator on the chart of the currency pair that you plan to analyze, then in the bottom window you can see three lines: the blue main, pink and green dashed lines. The main blue line shows the strength of the trend. The higher its location, the stronger the market participants push the price in a certain direction.
If the line is at the level of up to 20, the trend strength is very small. When the range between 20 and 40 levels is reached - the average movement force, if the line crosses the 40 level, the price movement is characterized by the presence of a strong impulse either from the side of sellers or from buyers.
What is the indicator talking about?
Dotted lines indicate a bearish or bullish market sentiment. The green line is conventionally designated “+ DI”. When it is located above the other two lines, the price rises. If a pink dashed line, symbolically indicated as “- DI”, runs along the top, there is a falling trend in the market. A change in trend occurs when the lines intersect. It is on the basis of these two lines that the ADX indicator is calculated. The description of the tool allows you to consider several profitable entry points:
- If the main indicator line (blue) is located between the + DI and - DI lines, while it indicates an upward direction, this indicates an increase in the growth trend, and purchases can be considered. If the direction of the line is reverse, we look at the sales.
- When there is a strong trend in the market, and the ADX indicator is located above the auxiliary lines, it’s worth taking into account that the trend is already close to the end and it does not make sense to open any deals. If there are open positions, they should be closely monitored. Closing orders is necessary when the main line goes actively down.
Key recommendations for using the indicator
Not all Forex indicators can give a signal to buy or sell, but ADX is just one of those tools that predicts rather than analyzes the situation in fact. If the market has a flat, and all the lines of the instrument are tightly intertwined with each other, it is better to abandon its use and give preference to one of the oscillators. Using lines, you can determine the strength of a future trend. It is worth paying attention to the aspect that the indicator cannot indicate the direction of the trend, it can only indicate its presence in the market or its absence. In a “bearish” trend, the line may be directed down, and this will indicate precisely the presence of a strong and impulsive movement. With the advantage of the bulls, the line will be directed up. Trading efficiency will sharply increase if you use simultaneously 2-3 trading indicators and inclusive the ADX indicator. How to use it, we examined a little higher.
Tool versatility
The main advantage of ADX can be called the effectiveness of its use on different timeframes. If identical signals come from a trading instrument over several time periods, it is worth considering opening a position, having previously assessed the situation in the market. The tool is applicable to intraday and swing trading. In the latter case, the use of the indicator from one day to several is recommended to pay attention to the results of recent trading sessions. It is advisable that in the trading range, the main line of the Average Directional Index crosses the trading level 40 as high as possible. For the convenience of assessing the situation, you can set the levels in the instrument settings.
How to combine a trading indicator with a trading strategy?
The indicator can be successfully entered into any trading strategy. It is not recommended to use it on its own, but in combination with other tools and with confirmation by secondary signals, it can provide decent profitability to the trader.
Consider what tools experienced traders combine the ADX indicator with. The strategy involves opening a position when one of the signals described above takes place near a key level or in the structure of a technical pattern (technical analysis figures). Instrument lines work well in combination with candlestick analysis patterns . For example, if a pin bar has formed on the price chart, which indicates a trend reversal, and the main line of the indicator has been intertwined with other lines below level 20 for a long time, you should prepare for a significant drop in price and a very strong impulse. And if this picture is supplemented by economic factors of fundamental analysis, it is worth preparing for the opening of a profitable transaction.
Adjust the position
For trading on any of the timeframes, the standard ADX indicator setting is suitable. Traders who work exclusively with technical analysis can adapt the program to their needs. There is already a personal matter for everyone, but for beginners it is preferable not to change anything in the settings and leave everything as it is. Entering a deal is permissible even when, with a clear trend, the indicator line crosses level 30. To open a position is a small lot.
At the moment when the blue line crosses level 40, you can top up. To determine a more accurate entry point, it is worth moving to smaller hourly charts on the eve of making a decision. This will reduce the ratio of loss to profit, will allow you to win back the deal in the best way.
ADX to reduce risks
ADX-indicator can be successfully used with relatively weak market movement, but with its actual presence. To avoid a series of stops on a number of transactions, you can be guided by the location of the lines. For example, if the price is actively moving to a level and is ready to break through all indicators, but the indicator indicates a slowing trend, it is not worth entering the market. The strength of the "bulls" or "bears" is simply not enough to continue the movement. Having taken note of the readings of the lines and their location relative to the levels, the number of lossers as a result of false breaks will decrease significantly.
How to determine the period of consolidation in the market and refrain from trading?
The ADX indicator may become an excellent indicator of consolidation in the market. It is very problematic to determine the fading of the trend and the transition of the market to flat. If the trend along three lines is downward, we draw attention to the fact that it is problematic to call the situation favorable for trade on the market. A systematic decrease from the level of 50 to the bottom warns of low volatility. If trading is based on breakouts and bounces, then intersection with level 40 lines can be interpreted as the beginning of an active trend and the end of the stagnation period on the exchange.
The explosive mixture of ADX and MACD
Considering the indicators of "Forex", it is worth saying that the most harmoniously ADX is combined precisely with MACD. If you install two instruments on the chart, they will eliminate false signals from each other. When ADX indicates a strong movement in the market, the MACD indicator is able to show the direction of this movement. This will eliminate the confusion and difficulties that traders encounter, just starting to trade with this tool. Quite often, due to inattention, the rising blue line is associated with a growing trend, and falling - with a falling one.
An excellent buy signal can be the simultaneous growth of two indicators. When both indicators go down, this indicates the extinction of the movement, MACD, in turn, portends a trend reversal.
Lag is one of the main disadvantages that the ADX indicator has. The description of the problem is very simple. The bottom line is that the indicator correctly signals the strength of the trend only when the reversal (flat) itself is not delayed for a long time. The problem is that the history of the existence of a certain trend, on the basis of which the graph is built, is very quickly erased. Data analysis may be distorted. This implies the fact that it is rational to use the indicator signals only at the very sources of the trend origin, at the moments when the three lines of the instrument practically lie at the lower level. The longer they stay in this position, the greater the profit you can expect.