Another indicator that might grasp your attention is ADX, the trend strength indicator.
The MT4 indicator automatically includes 3 lines:
- Average Directional Index (ADX) itself (thick yellow line)
- Plus Directional Indicator (+DI) (green line) - difference between two consecutive highs
- Minus Directional Indicator (-DI) (red line) - difference between two consecutive lows
How to interpret:
+DI and -DI define the directional movement. In general, the bulls prevail when +DI is greater than - DI, while the bears have the edge when -DI is greater. Crosses of +DI and -DI make a trading system in combination with ADX.
ADX (yellow line) is used to determine if the currency pair is trending or not. A strong trend is in place when ADX is above 25 and there is no trend when ADX is below 20. There appears to be a gray zone between 20 and 25.
“Buy” signal occurs when +DI crosses above -DI (ADX must be above 25). Stop-loss is usually put at the low of the signal day. The buy signal remains in force as long as this low holds, even if +DI crosses back below - DI.
And vice versa, “sell” signal occurs when -DI crosses above +DI (ADX must be above 25). The high of the signal day becomes the initial stop-loss.
Other articles in this section
- Williams’ Percent Range (%R)
- Relative Vigor Index (RVI)
- Force index
- Bulls/Bears Power
- Average True Range
- Monetary policy: impact on exchange rates
- CCI (Commodity Channel Index)
- Standard deviation
- Parabolic SAR
- RSI (Relative Strength Index)
- Bollinger bands
- Moving averages
- Trend indicators
- Introduction to technical indicators
- Support and resistance
- Technical analysis
- Central Banks: policy and effects
- Fundamental factors
- Fundamental analysis
- Fundamental vs technical analysis