How to use ADX – Average Directional Index
Currently are known several thousand of Forex indicators. However, only a few of them can be called classical tool of currency market which really work. ADX indicator or average directional index refers just to such tools.
What is ADX on Forex
Technical ADX indicator is widely used to determine the trend strength on Forex. This tool was developed by Wallace Wilder for trading on primary and currency market. While developing ADX the indicators +DI and –DI which allows traders to see the movement strength of upward and downward trend were used as the basis. Wilder added the third sliding line which generates trading signals by smoothing DI lines. Thus, the ADX indicator is presented on the chart by three lines:
- +DI – the indicator of the uptrend;
- -DI – the indicator of the downtrend;
- ADX – the indicator of average directional motion.
ADX index shows the strength of the trend regardless of its direction and +DI, -DI indicators determine this direction. The use of these three tools together allows determine accurately the strength and direction of tendency at market and also to identify the most favorable points of trading position’s opening.
How to identify ADX signals
To use the ADX indicator you need to know the basic principles of its activity. For it, first of all, need to monitor the position of ADX line on the chart.
- If the ADX indicator lone is below level 20, it means that Forex market is in flat and it is worth to wait with transactions’ opening.
- The growing ADX line is located between levels 20 and 40 – it indicates about the emergence of a new trend, then it is time to open deals in its direction.
- If the ADX line has crossed level 40 and continues to grow, it means that soon a correction or reversal of the trend should be expected, therefore it is dangerous to open deals in the direction of the current trend.
- The intersection of level 70 is extremely rare and indicates a very strong trend.
When using ADX indicator it is also necessary to pay attention to the +DI and –DI lines position. Their intersection in various ways is a signal to open deals of buying or selling. That is:
- If –DI crosses +DI from the bottom up, it means that the uptrend in reverse and it is necessary to open transactions for sale.
- If +DI crosses –DI from top to bottom, it indicates a reversal of the downtrend and it is time to open deals for purchase.
- The closer the DI lines are to each other are, the weaker the trend.
- If the ADX is below level 20, it is recommended to ignore the intersections of DI lines, since the trend in this case is very weak and such signals are unreliable.
High efficiency of trade can be achieved if to use the ADX indicator in combination with other indicators. When trading in trend markets, the best work is the tandem of ADX indicator and moving averages. On the flat market the most accurate signals can be obtained by using ADX in combination with oscillators.