When trading, measuring the strength of a trend, regardless of its direction, can be helpful. The ADX indicator is a popular indicator for assessing trend strength.
The directional average index, or ADX for short, is another example of an oscillator (an indicator displayed in a window separate from the price chart). ADX ranges from zero to one hundred. If it shows less than 20, it means that the trend is weak, and if it shows above 50, it means that the trend is strong.
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Calculating ADX can be a complicated task, but in short, the stronger the trend, the higher the ADX value.
When the ADX value is low, the emphasis is on periods where the price trend is usually neutral or sideways or trading in a certain range.
When the value of the ADX indicator reaches above 50, it indicates that the price has accelerated in one direction.
Unlike the stochastic indicator, the ADX indicator does not indicate an uptrend or downtrend, but only measures the strength of the current trend. For this reason, the ADX indicator is commonly used to indicate whether the market is suffering or a new trend is forming.
The ADX indicator is considered a “non-directional” indicator. This indicator works based on comparing the ceiling and floor points of the candlesticks and does not use the closing price of the candlesticks.
The stronger the trend, the larger the number of this indicator, regardless of whether the trend is up or down.
How to use the ADX indicator
When using the ADX indicator, consider the numbers 20 and 40 as the key levels of this indicator.
The following is a small cheat sheet to help you interpret ADX indicator values.
| ADX amount | Denotes: |
| increasing | Strengthen the trend |
| decreasing | Weakening process |
| Less than 20 | Weak trend |
| Between 20 and 40 | Strong trend |
| Above 40 | Very strong trend |
Take a look at the neat charts below:
How to use ADX indicator?
In the first example, the ADX indicator remained below 20 from late September to early December.
As you can see in the chart, the Euro / Franc pair is stuck in a certain range during this period.
However, the ADX indicator started to climb above 50 in January, which indicates that a strong trend can be expected to be formed.
You can see! The euro / franc pair has broken the support line of the volatility range and has gone down sharply by going below it. Yes! You earned about 400 pips!
Make a note baby!
Now let’s look at the next example.
How to use ADX indicator?
Just like the first example, the ADX indicator has been in the waiting phase for a long time below 20. During this time, the euro / franc pair has also been in a state of suffering or without a trend.
Shortly afterwards, the ADX Indicator climbed above the 50 level and the Euro / Franc pair broke the resistance line above its volatile range.
my God!
There was a strong uptrend. This process can be 300 pips, depending on your service!
Sounds simple, doesn’t it?
The only problem with using the ADX indicator is that it does not say exactly where the buy or sell situation is.
What this indicator says is whether it is right to enter a continuous trend or not.
When the ADX indicator starts to fall below 50 again, it means that the uptrend or downtrend is weakening and now can be a good time to maintain profits and exit the market.
How to trade using ADX indicator ?
One way to trade using the ADX Indicator is to wait for support or resistance to break before deciding to buy or sell.
The ADX can be a confirmation of the decision whether the pair is likely to continue its current trend.
Another way is to combine the ADX indicator with another indicator, especially the indicator that determines whether the currency pair is moving down or up.
We can also use ADX to determine when to close a position.
For example, when the ADX indicator starts to fall below 50, the current trend is losing momentum.
From now on, the currency pair is likely to fluctuate neutrally (sideways), so it may be best to close your trade before this happens.
As the saying goes, “your friend’s trend” until he stabs you in the back.
No, wait.
I mean… “until the trend goes back.”
(I became engrossed in my own memories for a moment).
The next time you think the trend is changing and you have to decide whether to stick to this “friend” or end your relationship with him, try using the ADX indicator to confirm the strength of the trend. The purpose of this Forex training course is to help you make tough decisions.
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