Yes, but it provides better strategy signals when combined with price. Investors should first use ADX to determine whether prices are trending or non-trending and then choose the appropriate trading strategy for the condition. It is considered by many traders to be very reliable for what it does, and is alvexo forex broker widely used.

ADX Indicator: How To Use It For Effective Forex Trend Analysis

When trading, it can be helpful to gauge the strength of a trend, regardless of its direction. The original ADX uses SMMA (i.e. running MA or Wilders EMA), while DMI Oscillator allows traders to experiment with the other types of averages as well. We will take profit after the ADX indicator breaks back below 25, which tells us that the strength of the prevailing trend is decreasing. You can also consider RSI going back into the normal zone as the exit point. Therefore, if the price is heading lower during the last 50 candlesticks, you are in a bearish trend. And, if nothing else, ADX is one of the more popular indicators on the market.

The ADX Line Reflects Trend Strength, Not Direction

Traders should also consider other technical indicators and perform thorough analysis before making trading decisions. ADX is not a suitable indicator for trading when prices are moving sideways in a trading range. Also, it is a lagging indicator, based as it is on a moving average. Finally, it says nothing about the actual price of a security, just the direction of prices and the strength of a trend. So it’s wise to use ADX along with other technical indicators to determine specific entry and exit points.

Example of How to Use Wilder’s DMI (ADX) Indicator

Additionally, low ADX values can also indicate a consolidation phase in the market. This means that the price is consolidating within a range, with neither the bulls nor the bears having a significant advantage. Traders should be cautious and avoid taking large positions during these periods as the market could break out in either direction. When using ADX, it is important to understand that it does not provide information about the direction of the trend, but rather the strength of the trend.

If you rely solely on the dotted lines, it will provide false signals in more than 50% of the cases. Meeting the second condition – crossing the 20th level from the bottom up – is essential. It signals that the price is exiting the flat, and there is a directional movement (i.e., a trend) forming. Some people recommend opening a trade only after crossing the 30th level.

Now, I will describe how the chart analysis works and open a trade. And while it’s in the market, I will continue the explanation. Apply the indicator to the chart of the needed currency pair. In the first scenario, the downtrend movement ended as soon as the index reached the 50th level. In the second scenario, the downtrend continued but gradually transitioned into a sideways movement. You can download the Excel calculation template for the ADX Indicator here.

It is often mistaken for a breakout of key levels, while it stays local without receiving confirmation and the price goes back to the flat corridor. In addition, ADX identifies trading range conditions, so a trader won’t get stuck trying to trade the trend when there isn’t one, i.e., in ifc markets review sideways price action. Moreover, ADX shows when price has broken out of a range with sufficient strength to use trend-trading strategies.

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For example, go to Investing.com and select Tools / Stock Filter from the top menu. On the page, select the Technical Indicators tab / ADX, and set its value in the range. From the drop-down list, select the stocks of the companies that are included in the LiteFinance cabinet, and analyze the chart in more detail. We have another review – on the relative strength index RSI – that describes how to work with screeners with screenshots and practical examples.

1. The two indicators are similar in that they both have lines representing positive and negative movement, which helps to identify trend direction.
2. Some people recommend opening a trade only after crossing the 30th level.
3. In both situations, if the blue is moving upward from 25%, it’s a signal of a trend.
4. Close the trade on the candlestick marked with a yellow arrow, as all three lines of the oscillator turned downward.
5. +M is an absolute positive price movement, -M is an absolute negative price movement.

ADX assists you, but it can’t be considered the main indicator. This isn’t recommended, but you need to work intuitively and improvise in trading. Here, I notice the same conditions, but the ADX indicator has already crossed the 20% mark.

Be aware that despite the decreasing momentum, the trend may still continue. Still, a trader must be more attentive and selective about the new entry signals in this case. It might be wise to tighten stops for the existing positions or think about partial take profits. All in all, when the ADX line is going up, the trend strength is increasing, and the price moves in the direction of the trend. When the line goes down, trend strength decreases, and the price goes through a correction or consolidation.

A higher ADX value indicates a stronger trend, while a lower value indicates a weaker or ranging market. Any reading less than 20 is considered to be a weak trend and may signal an impending reversal. The second option turned out to be more effective, since I wasn’t completely guided by the oscillator data but also levels and Price Action.

This suggests that the trend strength is still high, ADX peaks, but there may be a reversal. Open a short position 3-4 candles after the crossover of the +DI and -DI divergence. We are waiting for the dotted +DI and -DI lines to start diverging and when the index line begins to exit the 0-20% zone at the same time.

ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although other time periods can be used. The following chart shows Shopify Inc. (SHOP) with both trending periods and less trending periods. -DI and +DI crossover multiple times—potential trade signals—but there is not always a strong trend present (ADX above 25) when those crossovers occur. The Average Directional Index, or ADX, is the trend strength indicator.

Sell when the RSI indicator breaks, showing a reading below 30. This strategy, however, always requires higher time frames as well as an instrument with some volatility and a high ATR. The ADX has a tendency to lag and the volume meter is generally very slow, which can lead you to enter the market too late. ADX should only be used with higher time frames because it tends to give false information on lower time frames. If the -DI is above the +DI, when the ADX moves above 25 that could trigger a short trade.

It can be used in various markets, including stocks, commodities, and cryptocurrencies, in addition to forex. The two oscillators complement each other perfectly and compensate for each other’s weak points. You can look for trends on stock charts ADX using stock screeners.