In this post we’ll take a look at the ADX which is also known as the average directional movement index it’s an indicator that forex traders will use in order to measure the strength of a trend it represents the average price ranges.
That are expanding our contracting over time it shows a line that moves up and down as you can see at the bottom of the chart showing you whether or not there is strengthen the movement.
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It doesn’t define the direction it simply shows the strength of a potential trend or move it measures the moving average of expansion of price during a specific amount of candles typically 14 and that’s what this one said – that’s.
Your default setting should also be noted just for educational purposes there are two other lines the negative di and the positive and they also go on the chart now most traders don’t use those it’s basically used with the Bill Williams system and truthfully later on in his career he started to suggest that he didn’t use them.
How to use the ADX indicator in Forex
Furthermore so if you’re gonna go down that path and yes it may be something to look into but the majority of forex traders probably 99% of them don’t even pay attention to it so it’s all about the ADX itself you need to understand that there are certain levels that people will pay attention to.
So for example from 0 to 25 because we are bouncing between 0 and 100 this is topped out at 64 here because that’s as far as we’ve gotten so there’s no trend or pretty much non-existent right from 25 to 50 you have a trend it’s reasonably strong 50 to 75 very strong trend and 75 to 100 extremely strong trend. So obviously the higher the better now again remember it doesn’t matter which direction the markets moving so take a look at this we’re going down.
Here but we’re going up here that shows you that we are picking up strength right it works on all time frames it just measures 14 candles doesn’t matter the time frame and it can be used to give you confirmation as to whether or not you should stay with a trend so for example as this is selling off this is rising so well this is telling you as prices.
Expanding over the last 14 candles that means that we’re seeing more conviction and you can see what happened now on higher time frames it’s quite often used to determine you know hey should I be thinking about taking profits or should I be thinking about letting profits run now notice that the ADX is right here like when we gapped up on the weekly chart.
You can see that it’s at 26 26 point five five – so that is strong trend and then as time went on we started to rise here and we ended up right around 61 right around here at the top so this entire time you could have let your profits run having said that there’s also concerns about divergence so notice something here we shot higher we had this a little bullish flag and we rose well look at how much weaker it is here.
That’s divergence price going higher and a lower high showing that maybe something’s not quite under right underneath so in that scenario if you are in this it might be time to go long or if you’re already long this may be time to take your profit however if you see this up here and you see this you don’t want to go long you could think about selling.
on a break down below support or just simply avoid it all together at least until we pick up some momentum and you can see since then we got a little bit of a pop here where the momentum picked up again but it really has dropped pretty significantly for most of the last couple of years say got a little bit of a pop here.
And this area here and now we’re right back to abysmal numbers so this also can give you an idea as to where you’re going to get the most profits euro dollars not it it’s a very tight and doesn’t really move much type of pair but it’s a great example of how it can keep you in and out of it