How to Read and Use Average Directional Index (ADX) in Forex Trading

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Average Directional Index (ADX) is an indicator which is able to recognize the trend’s force within price movement. Introduced by J. Welles Wilder, this indicator is basically designed to help traders find a visualization of the current trend movement. Ithe ADX provides signal whether the present trend is going to persist and strong or will conversely weakened and turn its direction.

Being as a trend confirmation and filtering tool, many forex traders assume that this indicator is quite difficult to use since it has so many filtering processes to the trend leaning within a particular market. The all processes make the ADX needs more time to provide a confirmation signal to open position. Well, actually we can’t blame the ADX for this case. The first idea of this indicator was to visualize the trend movement and help traders reading the direction of the current trend and then predict its strength. Not exactly to give signal for entry/exit point.

In general, ADX is having three lines:

  • The ADX line (white line)
  • +D1 line (green line)
  • –D1 (red line)

The trend confirmation is on the level 20. When the ADX goes beyond 20, it gives information of a strong trend. If the ADX is below 20, it could be a signal that the trend tends to be weak or uncertain. We can add level 40 as a confirmation of a strong trend movement.

In a weak or uncertain trend, the price usually tends to form a sideways position. When the ADX is below 20, creating a top and bottom limit will possibly help. We can use the top limit order sell and the bottom limit order buy with a tight stop loss.

When the ADX is above 20 and beneath 40, we may prepare ourselves to predict the tendency of a trend direction. Remember that level 20 is a confirmation point. It means that market trend will begin to move. We can add other forex indicator such as Moving Average or Parabolic SAR as a beginning tool.

The right momentum to make profit and finding pips will be good when the ADX passes or crosses level 40. Here, the trend tends to be strong and this will enable us to make more profit. We can use the Stochastic indicator to help us reading the existing market condition. Don’t forget to save the current profit by taking some additional positions such as by using trailing stops feature or a tight stop loss.

Happy trading in PAMM Investments !

Don’t forget to read this important article for PAMM trader

1. How to become a PAMM Trader

2. Understanding your Forex Trader Level as PAMM Trader