There are other technical analysis indicators similar to the ADX, like the parabolic SAR, moving averages, and envelopes. The index’s main line shows the trend strength – when buying volume exceeds selling volume and vice versa. If the index moves horizontally below level 20, the market is flat.

The moving average (MA) of 100 is applied to determine is the momentum in the market is bullish or bearish. That is why traders take many losses with ADX alone when the market goes sideways. If using the indicator for signals, there will be whipsaws. Whipsaws occur when the indicators criss-cross back and forth, resulting in multiple trade signals that produce losing trades. If DI+ is above DI-, an ADX reading of 25 or higher indicates a strong uptrend.

Identifying Range Markets with ADX

Breakouts are not hard to spot, but they often fail to progress and end up being a trap. However, ADX tells you when breakouts are valid by showing when ADX is strong enough for prices to trend after the breakout. When ADX rises from below 25 to above 25, price is strong enough to continue in the direction of the breakout. Any time the trend changes character, it is time to assess and/or manage risk. Divergence can lead to trend continuation, consolidation, correction, or reversal (below). The chart above is an example of an uptrend reversing to a downtrend.

The Plus Direction Indicator (DI+) and Minus Direction Indicator (DI-) show the current price direction. When the DI+ is above DI-, the current price momentum is up. When the DI- is above DI+, the current price momentum is down. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience. Remember that the ADX itself does not indicate the direction of the trend, only the strength of the trend. The situation indicated in point 1 was explained at the beginning of this section.

How to use currency strength meter

When price makes a higher high and ADX makes a lower high, there is negative divergence, or non-confirmation. In general, divergence is not a signal for a reversal, but rather a warning that trend momentum is changing. It may be appropriate to tighten the stop-loss or take partial profits. Knowing when trend momentum is increasing gives a trader the confidence to let profits run instead of exiting before the trend has ended. However, a series of lower ADX peaks is a warning to watch prices and manage risk.

Close is a close price of the candlestick and i and i-1 are current and prior candles. Nevertheless, ADX is included in the basic MetaTrader 4 package and is often used in trading systems as a signal confirmation instrument. In an uptrend, price can still rise on decreasing ADX momentum because overhead supply is eaten up as the trend progresses (shown below). ADX can be used with any financial security that trades, including stocks, mutual funds, exchange-traded funds, and futures. One way to trade using ADX is to wait for breakouts first before deciding to go long or short.

Like any indicator, the ADX should be combined with price analysis and potentially other indicators to help filter signals and control risk. In a trading range, the trend is sideways, and there is general price agreement between the buyers and sellers. ADX will meander sideways under 25 until the balance of supply and demand changes again.

Trading ADX Signals

1. The image below portrays this well and, as we can see, there is a lack of a trend.
2. It’s also reasonable to explore the opinion of industry experts as well as constantly research the market to try to predict the asset’s future performance.
3. Traders may find it challenging to identify profitable trading opportunities as the market lacks a clear trend.
4. If there are more buy orders, the price starts to rise, and +DI moves upward.
5. However, trades can be made on reversals at levels of support (go long) and resistance (short).

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Opening a trade during the reverse crossover of +DI and -DI, ADX rose over the 40th level. After the price exits the flat, it reaches its maximum, where it could possibly reverse. The index line is still showing a strong trend, while +DI and -DI swap. This corresponds to entering the overbought or oversold market. At point 3, the trend direction is likely to change again — the dotted lines converge, and the index line has turned upwards. At point 4, we close all short positions if it wasn’t done at point 3 because the indicator line goes below the 20% level.

Wilder considered coinbase exchange review a value above 25 to suggest a trending market, whereas a value below 20 suggests that there is little or no trend. Due to timeframe restrictions, scalping and swing trading aren’t suitable. Comment below if you need templates for these indicators or if you don’t know how to download ADX in a modified version. In detail, with screenshots and practical examples, work with screeners is discussed in the review of another indicator – the relative strength index RSI. You will find out at the end of the review whether my search for a new trend succeeded or if the price continued to move in a downtrend.

It’s important to emphasize that while ADX measures the strength of a trend, it does NOT identify the trend’s direction. The ADX or Average Directional Index is a technical indicator used to measure the overall strength of a trend. The conditions for the trading strategy are described in general terms and may change depending on the market situation. Therefore, figure out the optimal set of indicators and their combinations using demo retail investor accounts. As soon as ADX rises above 20%, open a short Forex trading position as -DI is at the top.

Having sorted out the theory, let’s look at some practical examples on how to use ADX in Forex trading. In the Display tab, specify the timeframes where you want to display the same window when switching to charts of other intervals. On the top menu, click Insert / Indicators / Trend / Average Directional Movement Index. The signal is lagging – the current trend has already reversed.

Irrespective of whether the trader takes a long or short position, the ADX should be over 25 when the crossover occurs to confirm the trend’s strength. When the ADX is below 20, traders could use trading strategies that exploit range bound or choppier conditions. Whether it’s the stock market, forex, or commodities, the ADX can provide valuable insights for any trader. As an expert in forex trading, I have personally experienced the benefits of incorporating ADX into my trading strategies.