The main ADX line determines the trend strength. The lower the value of the main ADX line, the weaker is the trend; the higher the value of the main ADX line, the stronger is the current market trend.
Using ADX to Determine a Trend Strength
Before we jump into the mind breaking information about the Average Directional Index (ADX) indicator, let’s start from the basic.
This indicator is typically used for technical analysis of any market and serves as the objective value to know the strength of a specific trend. The main ADX line is also referred as non-directional indicator so it only measures the strength of a trend depending on its ups and downs.
If the main line of the ADX is rising up above the line of 20, it means that the trend is consistently increasing and is strong. But if the ADX starts to fluctuate below the line of 40, it means that the trend is likely to reverse or at least stop for a while since it is getting weaker. And if the main ADX line is below the 20 level, then there is not any strong trend at all.
Determining the Trend Direction using the ADX Indicator
When it comes to the plotting part, ADX is typically plotted in a separated chart window together with additional two lines called Directional Movement Indicators or DMI. There are two DMI lines: Plus Directional Movement Line (+DI) and Minus Directional Movement Line (-DI).
If you would observe an Average Directional Index (ADX) indicator chart below, it is usually said that the trend is likely to rise if the green line (+DI) is above the orange line (-DI). On the contrary, the trend is likely to fall if the green line (+DI) is below the orange line (-DI).
However, as you can see in the chart above, it is important to avoid the range markets going sideways when using the directional signals of the ADX indicator. In the range periods, the DMI lines tend to provide false signals, while if there is a strong trend in the market, the DMI lines can provide signals soon enough to catch the beginning of such trends.
How Does the ADX Indicator Work
The Average Directional Index (ADX) indicator can decide both if the trend is bearish or bullish as well as determine the strength of the latest trend with the help of advanced technology. Because of that, the Average Directional Index (ADX) indicator is commonly used for identifying if a certain market is ranging or starting a whole new trend in the market.
How can Average Directional Index (ADX) indicator quantify the strength of a certain trend? Simple, the ADX measures it based on the moving average price range expansion during a specific period of time.
More importantly, it can be used to analyze various markets such as stock indices, commodities, futures, stocks, and exchange-traded funds. As a matter of fact, this indicator is often used as the most efficient tool by forex traders to select the strongest market trend and plan trades in its direction.
For veteran traders and investors, they consider trend as their friend. However, it requires a lot of time and effort to get to know the trend and go with the flow. There are various indicators that can be used in trading in order to see which trend is the strongest or weakest in the chart. But once the trend is already determined, it is for you to face the challenge of getting the right timing of entering and exiting the trade.
And ADX comes in really handy in forex trading if you want to know the strength of current market move and in a conjunction with other tools, it can be used to catch the right time of entering a trade once a trade was already determined in a certain direction.
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