While there are many technical indicators available, only a small number are really useful for efficient trading. Among them, the ADX indicator stands out. We explain why and how to use it.
What is the ADX Indicator?
THEADX indicator is a technical indicator that measures the strength of a trend in the stock markets.
ADX is the abbreviation of Average Directional movement indeX, or in French, the average directional movement index.
It is part of the DMI, or Directional Movement Index, developed in 1978 by J. Welles Wilder, also father indicators RSI, ATR or SAR parabolic.
The DMI is an indicator widely used in technical analysis and is offered as standard on various trading platforms, such as MetaTrader 4.
The ADX technical indicator does not indicate the trend, bullish or bearish, but the strength of this trend.
How Does the ADX Indicator Work?
The ADX indicator is one of the three curves that make up the DMI. The other two are:
DI +, Plus Direction Indicator, or Positive Directional Indicator in French
DI-, Minus Direction Indicator, or Negative Directional Indicator in French.
On MT4, ADX is represented by a light blue curve, DI + by a dotted green curve and DI- by a dashed red curve. In terms of setting, the default value of the ADX MetaTrader 4 is 14.
ADX indicates the strength of a trend; the higher the value of ADX, the stronger the trend.
The curves DI + and DI- indicate the directional movement:
If DI + is greater than DI-, then the directional movement is positive.
If DI + is less than DI-, then the directional motion is negative.
How to Interpret the ADX Indicator?
According to JW Wilder, the ADX indicates a trend when its value is equal to or greater than 25. Below, the market is not trending.
If the ADX is greater than or equal to 25 and DI + is greater than DI-, then the trend is upward.
Conversely, if the ADX is greater than or equal to 25 and DI- is greater than DI +, then the trend is bearish.
However, some traders believe that an ADX of 20 is sufficient to indicate a trend. Others prefer to wait for an ADX of 30 to follow a strategy based on the market trend.
How to trade with the ADX Indicator?
You can open a long position when DI + exceeds DI- and set a stop-loss below the current low.
When DI exceeds DI +, you can open a short position with a stop above the current high.
The DI + and DI- curves deviate when volatility increases and move closer when volatility decreases. Short-term traders can therefore enter a position when DI + and DI- move away to take advantage of volatility.
The ADX indicator can use in any type of market. In Forex, ADX is very common.
ADX trading is a strategy based on the analysis of the market trend. To be effective, the ADX indicator should be used:
- As a confirmation method of the current trend,
- In addition to other analytical measures.
To learn how to master the ADX indicator and make sure that it suits your trading strategy, you can test it on a demo account and thus practice with fictitious capital, therefore without taking any risk.