The ADX indicator (Average Directional Movement) is a technical tool designed to measure the strength of a market’s trend. The ADX indicator is used for multiple purposes, such as trend strength measurement, trend finding and range finder.
ADX indicator definition and overview
The ADX indicator (Average Directional Movement) is a technical tool designed to measure the strength of a market’s trend. The ADX indicator is used for various purposes, such as a measure of trend strength, a trend and range finder, and a filter for different forex trading strategies.
The ADX indicator basically helps traders understand if there is a clear trend in the market and, if so, how strong or weak that trend is. The ADX indicator can also help traders know when to enter the market and when to walk away from the market when there is a sideways trend.
This information can be very valuable to a trader, as the markets usually trend only 30% of the time, while they trade sideways about 70% of the time. For most traders, the biggest losses usually come when the market moves sideways. Thus, the ADX indicator can provide technical clues as to the most appropriate market entry time.
Determining the trend in the forex market is one of the most important aspects of technical analysis. With knowing the current price direction, it can be easier for traders to implement the strategy correctly.
Trends can be analyzed in different ways, such as price action analysis (classic analysis or what is known as Price Action) or by using some other technical methods such as Elliott waves, moving averages and other commonly used technical means.
Explanation of the ADX indicator in detail
The ADX Technical Indicator is derived from two Wilder Trend Indicators:
- Positive Direction Index (+DI)
- Negative Direction Index (-DI)
These indicators complement the ADX indicator by providing a guide to the direction of the trend, and they come from very simple measures of the directional movement in the market. It determines the trend movement by comparing the current period’s highest and lowest points with the previous period’s highest and lowest points. Wilder identified two terms that help here:
- Positive directional movement (+DM)
- Negative directional motion (-DM)
Directional movement can be either positive, negative or zero.
Negative directional motion is defined in a similar way. The directional movement is negative when the previous low minus the current low is positive and greater in value compared to the previous high minus the current high. When (+DMI) is higher than (-DMI), prices rise, and the ADX indicator measures the strength of an uptrend. When (-DMI) is higher than (+DMI), prices are moving lower, and ADX measures the strength of a downtrend.
For new traders, when it comes to explaining the ADX indicator, the good news about the ADX indicator is that modern trading software does these calculations automatically for you. The standard MetaTrader 4 platform comes with a built-in ADX indicator, so there is no need to understand complex ADX indicator explanations mathematically.
Advanced ADX indicator for MetaTrader 4
Once you have MetaTrader 4 installed on your device, you will see the ADX indicator developed much more advanced than Wilder originally suggested. This is because the ADX indicator in MetaTrader 4 uses slightly different auto-smoothing techniques that provide a more accurate but less smooth chart.
How to read the ADX indicator
By now, we hope you understand that the ADX indicator is used to indicate whether the market is trending or not. But how do we know when a trend is forming? Basically, the ADX ranges from 0 to 100.
Wilder considered that if the ADX value is above 25, the market will start forming a trend, while if the value is less than 20, then there is little or no trend. But as you can see, these values leave you with uncertainty between 20 and 25. For this reason, many technical analysts use the value of 25 as the critical demarcation point between “trend” and “no trend”.
The ADX indicator determines if the price trend is strong and reduces risks, and increases profits within a strong trading strategy. The ADX average trend indicator determines when the price trend is strong. This is the exact trend indicator.
The basic rule for successful trading with any strategy is that the trend is your friend, for sure the ADX indicator helps you to know your friend, so you must know the following to know the value of ADX as an indicator of trend strength.
The ADX indicator is mainly used to measure the strength of the current trend
The ADX indicator consists of three lines, namely DI+, DI- and ADX. The indicator reading is between 0 to 50, where a reading less than 25 indicates a weak trend, a reading higher than 25 indicates a strong trend, and a reading between 30 and 50 indicates that the trend is at its strongest.
The default setting for the ADX indicator is 14, and traders usually choose a setting between 7 to 30. The higher the setting, the easier it is to read the price action and the more reliable its signal, while lower numbers lead to spotting the trend early, but it carries with it a lot of false signals.