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ADX values range between 0 and 100, where high numbers imply a strong trend, and low numbers imply a weak trend. According to Wilder, the trend has strength when ADX is above 25; if ADX is below 20, the trend is weak. The two DMIs in Wilder’s system are plotted on the same graph and used to indicate the strength of a trend by virtue of where they line up on a chart relative to each other.
It’s represented by one main, solid ADX line and two dashed lines +DI (+Di), -DI (-Di) – directional components that are placed below the price chart. In this guide, we will examine the ADX indicator in great detail and see how to calculate it, work with it, and find signals. Also, this article will analyze practical examples of opening trades with screenshots and ADX trading strategies.
Written by True Tamplin, BSc, CEPF®
ADX indicator particularly effective when used in conjunction with momentum trading strategies within the stock market and forex trading. This is because solid trends are typically more apparent within highly liquid markets, so the trader can ride the price trend smoothly until it ends. As a result, the ADX indicator is one of the most popular and effective trend indicators, especially when used alongside similar tools.
Both Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and revert to zero, so they cancel each other out. Positive and negative directional movement form the backbone https://www.bigshotrading.info/blog/how-to-use-rsi-indicator-in-forex-trading/ of the Directional Movement System. Wilder determined directional movement by comparing the difference between two consecutive lows with the difference between their respective highs.
Best ADX Trading Strategy
And while ADX trading is in full swing, I will continue explaining the theoretical framework. Now, I will describe how the chart analysis works and open a trade. If you don’t want the dotted lines to bother you, you can turn them off in the settings in the Styles tab. In the Levels tab, add fixed horizontal levels to visually limit the main range of movement of the indicator and overbought/oversold zones. Now is the smoothing itself, which takes into retail investor accounts the values for the past performance periods from the above calculations instead of the arithmetic mean.
Moreover, the ADX indicator alone won’t supply enough data to be used on its own and can provide false signals when used on shorter periods. Using the ADX indicator can provide us with information that is missing from a basic price chart. For example, the ADX helps determine support and resistance levels, which show whether a price is staying within its trend range or significant price fluctuations that may lead to a breakout. The ADX is a lagging indicator, meaning a trend must have established itself for the indicator to generate a signal that a trend is underway. ADX values range between 0 and 100, in which high numbers signify a strong trend and low numbers suggest a weak trend.
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Wilder suggests that a strong trend is present when ADX is above 25 and no trend is present when ADX is below 20. Before looking at some signals with examples, keep in mind that Wilder was a commodity and currency trader. The examples in his books are based on these instruments, not adx meaning stocks. This does not mean his indicators cannot be used with stocks, however. Some stocks have price characteristics similar to commodities, which tend to be more volatile with short and strong trends. Stocks with low volatility may not generate signals based on Wilder’s parameters.
When to trade ADX?
The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy.