If the technical indicators available are numerous, only a small number is really useful for efficient trading. Among them, the indicator ADX pulls out of the game. We explain why and how to use it.
What is the ADX Indicator?
THE 'ADX indicator is a technical indicator that measures the strength of a stock market trend.
ADX is the abbreviation for Average Directional movement indeX, 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.
ADX technical indicator does not indicate trend, bullish or bearish, but the strength of this trend.
How Does the ADX Indicator Work?
The ADX indicator is one of 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 the 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 trendy.
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 20 ADX is sufficient to indicate a trend. Others prefer to wait for an 30 ADX 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 come closer when volatility declines. Short-term traders can therefore enter the position when DI + and DI- move away to take advantage of volatility.
The ADX indicator can be used on any type of market. On the Forex, ADX is very widespread.
ADX trading is a strategy based on the analysis of the market trend. To be effective, the ADX flag must 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 it is suitable for your trading strategy, you can test it on a demo account and thus train with a fictitious capital, so without taking any risk.