You can decide on the effectiveness of the ADX indicator together with  +DMI and –DMI lines on the TickTrader platform for free. In the chart above, the ADX formed two significant highs Average Directional Index in a solid uptrend. ADX can also be used to determine when one should close a trade early. One way to trade using ADX is to wait for breakouts first before deciding to go long or short.

This makes it easy to identify directional indicator crosses. While ADX can be plotted above, below or behind the main price plot, it is recommended to plot above or below because there are three https://www.bigshotrading.info/blog/what-is-the-stock-market-and-how-does-it-work/ lines involved. The chart example below also shows the 50-day SMA and Parabolic SAR plotted behind the price plot. Only buy signals are used when trading above the 50-day moving average.

What Is an Average Directional Index?

A series of lower peaks, on the other hand, indicate a decreasing trend. Note that, although it might seem a bit confusing, the good thing is you won’t have to go through it every time you apply the indicator. The steps below are just for your reference and to help you understand the indicator’s mechanics. When trading, you will simply be leaving the computer to do the job. In fact, Wilder’s work is so essential that today many of his concepts are at the core of all charting software. He is also the father of some of the most popular indicators, including the Relative Strength Index (RSI), the Parabolic SAR, the Average True Range (ATR), and more.

• Traders can easily determine whether a market is ranging or trending, and then  apply the appropriate technical trading strategy.
• The idea is to combine the ADX with a complementary indicator that will provide a comprehensive analysis of an asset’s price.
• Calculating the ADX is based on a moving average (MA) of the price range expansion for a certain period of time.
• As the average directional index can reflect periods with a weak or no trend, it can be used for range trading.
• To start with, it is based on moving averages, which means that it is largely a lagging indicator that reacts slower to price changes in the market.
• It signals that the price is exiting the flat, and there is a directional movement (i.e., a trend) forming.

The index value of 50-60% indicates the imminent end of the trend. The larger the divergence, the higher the ADX and the stronger the trend. To have a clearer understanding of how ADX indicator works and avoid losing money rapidly, practice trading with this momentum indicator in your retail investor account. The ADX indicator is a technical analysis tool that helps traders gauge the strength of trends.

Indicators, Strategies and Libraries

At its most basic, the ADX indicator can be used to determine if a security is trending or not. This determination helps traders choose between a trend-following strategy or a non-trend-following system. A strong trend is present when ADX is above 20 and no trend is present when ADX is below 20. As noted above, chartists may need to adjust the settings to increase sensitivity and signals.

This corresponds to entering the overbought or oversold market. The main index line has been removed to avoid making the ADX momentum chart look cluttered. During the divergence, you can see the strengthening trend, its movement is getting more powerful – there are changes in the slope angle. The point that the arrow points to is where the +DI and -DI lines swapped. Here you can see the EURUSD currency pair chart on the H1 timeframe.

False Signals

Apply the indicator to the chart of the needed currency pair. In the Display tab, specify the timeframes where you want to display the same window when switching to charts of other intervals. On the top menu, click Insert / Indicators / Trend / Average Directional Movement Index.

His preferred instruments are ETFs but also maintains a portfolio of cryptocurrencies. Viktor loves to experiment with building data analysis and backtesting models in R. His expertise covers all corners of the financial industry, having worked as a consultant to big financial institutions, FinTech companies, and rising blockchain startups. In a nutshell, considering that the best profits usually come from catching strong trends, there isn’t a better tool for the purpose than the ADX.

How to use the ADX indicator

On the other hand, when you open a trade on a long timeframe expecting a long trend using a lagging signal, it’s considered one of the perfect conservative, low-risk trading strategies. The indicator line on a 1-minute interval was below the 25% level for 5 hours. The price chart shows a clear narrow flat of fewer than 10 points wide at 4-digit quotes. Considering the spread on such a range, only scalping trading strategies will be effective. Start looking for an opportunity to exit the trade on the forex market when the dotted lines are at the maximum distance and begin to converge. In the area highlighted by the red rectangle, the index line reverses inside the range in addition to the dotted lines’ reversal – it means the forex trading activity is weakening.