HOW TO USE ADX INDICATOR


ADX indicator cover post

In this tutorial, you’ll learn how to use the Average Directional Index ADX Indicator. First of all, the ADX is useful to determine the strength of the trend.

The Average Directional Index is a trend indicator. It was created by Wilder to measure the strength of the current trend.

The Average Directional Index shows you the trend direction by two associated indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI).

You can find the ADX preinstalled in many platforms with basic settings.

How to calculate the ADX indicator

The Average Directional Index shows you the trend direction by two associated indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI).

First of all, you have to calculate the Plus Directional Movement (+DM) and Minus Directional Movement (-DM)

The formula:

+DM =  High – Previous High

 -DM =  Previous Low – Low

Here you can find all you need to calculate the ADX.

How to trade using the ADX Indicator

Quite simply when the +DI crosses the -DI it creates a buy signal and vice versa.

Generally, this system doesn’t perform well. It could work with currencies that are in a strong trend.

The system does not lose, but it is not tradable. The profit factor and the net profit average trade are too low. Indeed, there is a series of false signals that disturb the strategy.

To use the Average Directional Index to trade, we need to add another indicator that provides us a more efficient signal.

How to read the ADX Indicator

The standard length for the Average Directional Index Formula calculation is 14 periods. Many traders using only one level for ADX reading, when ADX is greater than 20 or 25, the trend is strong. Probably it’s not enough.

ADX standard Indicator level 20

We like to use more levels.

We create four levels:

Average Directional Index Indicator levels

In this way, it is easier to read the ADX and the actual trend.

How to use ADX in forex

ADX Indicator was a reliable tool to trade the Forex Market. In the past, currencies were trending healthy, and for a long time. In the last year, the Forex Market is less volatile, and the trend follower strategies work poorly.

To use the ADX indicator in the Forex Market, you have to develop a strategy that uses the ADX to filter the trend.

ADX – TRADER JOHN TUTORIAL FOR BEGINNERS

The Directional Movement (DMI), conceived by the famous technical analyst Welles Wilder, is an indicator that allows you to identify the first direction followed by prices.

The indicator, which is usually calculated over 14 periods, also allows you to assess the solidity of the trend in progress on the market and to measure both the strength of the buyers and the sellers.

The theoretical assumption behind this indicator recalls the importance of the maximum and minimum prices that are recorded by the market every day.

Each day, the indicator calculates a positive directionality, measured as the difference between today’s maximum price and yesterday’s maximum price.

The indicator then compares this figure with a negative directionality, calculated as the difference between today’s minimum and yesterday’s minimum.

In practice, it measures how much higher the buyers managed to push prices today (compared to yesterday), and the lower the sellers today managed to push prices (compared to yesterday).

If the day was a consolidation, the indicator shows no directionality, neither positive nor negative.

From a different point of view, the Directional Movement is made up of three lines:

The first line, called Adx (Average Directional Movement Index), indicates whether the market is located in a directional phase or, on the contrary, is in a period of lateral congestion.

To interpret the Adx, it is sufficient to know that:

If the line has a value above 22 points, it means that the market is expressing a clear trend.

If the line has a value of fewer than 22 points, it means that prices are moving within a lateral consolidation phase.

The ADX and the strength of the trend

A second line, the + DI (Positive Direction Indicator), measures the positive directionality, which is the force expressed by the buyers.

A third line, the -DI (Negative Direction Indicator), measures negative directionality, i.e., the force expressed by sellers.

To understand all the information provided by the Directional Movement, it is necessary to analyze the collective behavior of the three lines.

If the Adx has a value higher than 22 points and is in an increasing phase, it means that the market is in a trend phase.

When the Adx is above 22 points and the value of the + DI is higher than that of the -DI, it means that the trend followed by the market is bullish.

If the Adx is above 22 points and the value of the -DI is higher than that of the + DI, it means that the trend followed by the market is bearish.

The Directional Movement Trading System

ADX sends a bullish signal when the + DI crosses the -DI from bottom to top, with the Adx having a value higher than 22 points and is increasing.

Average Directional Index sends a bearish signal when the -DI crosses the + DI from the bottom to the top, with the Adx having a value higher than 20 points and is increasing.

It should be noted that:

When the Adx has a value of fewer than 22 points, it means that the market is in congestion, with a substantial balance between the two forces on the field.

With prices moving within a lateral consolidation phase, volatility is, however, easing, creating the basis for an impulsive move.

When the ADX starts to rise and goes beyond 22 points, it means that the market has entered a directional phase.

To understand which of the two forces has taken over, it is necessary to monitor the progress of the + DI and -DI line.

If the first (+ DI) crosses the second (-DI) from bottom to top, it means that there has been a strengthening of the upward pressure.

If the second (-DI) crosses the first (+ DI) from bottom to top, it means that there has been a strengthening of the downward pressure.

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