ADX is the trend strength indicator | How to trade the Average Directional Index?

How to trade using ADX indicator

The MT4 indicator automatically includes 3 lines:

Average Directional Index (ADX) itself (thick brown line). Its values range from 0 to 100. This line registers a trend’s strength but it doesn’t show its direction.

Plus Directional Movement Indicator (+DMI) (green line) is the difference between two consecutive highs.

Minus Directional Movement Indicator (-DMI) (red line) is the difference between two consecutive lows.

The ADX line is used to determine if an asset is trending or not. A strong trend is in place when ADX is above 25, so there’s a sense to use trend-trading strategies. Consequently, when the ADX is below 25, it’s better to avoid trend trading and choose an appropriate range trading strategy. In such moments, the price enters a range. It’s necessary to point out that the ADX may be used to confirm a breakout of a range. When the ADX rises from below 25 to above 25, it means that the price is strong enough to continue in the direction of the breakout.

ADX value

There are more grades of the ADX value. You can check them in the table below:

ADX Value

Trend Strength

0-25

Absent or Weak Trend

25-50

Strong Trend

50-75

Very Strong Trend

75-100

Extremely Strong Trend

All in all, when the ADX line is going up, trend strength is increasing, and the price moves in the direction of the trend. When the line is going down, trend strength is decreasing, and the price goes through a correction or consolidation. Notice that the falling ADX line doesn’t mean that a trend is reversing. It simply means that the current trend is weakening.

In addition, if you look at the series of ADX peaks, you will get information about the trend’s momentum. If there’s a series of higher ADX peaks, trend momentum is increasing. This will let a trader know that he/she may keep the trend trades open letting the profit run. A series of lower ADX peaks means trend momentum is decreasing. Be aware that despite the decreasing momentum the trend may still continue. Still, in this case, a trader would have to be more attentive and selective about the new entry signals. It might be wise to tighten stops for the existing positions or think about partial take profits.

Classic signals from the ADX

+DMI and -DMI define the directional movement. In general, the bulls prevail when +DMI is greater than - DMI, while the bears have the edge when -DMI is greater. Crosses of +DMI and -DMI make a trading system in combination with ADX.

“Buy” signal occurs when +DMI crosses above -DMI (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 +DMI crosses back below - DMI.

And vice versa, “sell” signal occurs when -DMI crosses above +DMI (ADX must be above 25). The high of the signal day becomes the initial stop-loss.

Conclusion

The Average Directional Index is a very useful tool for trend traders. It’s recommended to use the ADX in combination with the analysis of price action and other technical indicators.

Frequently asked questions

How to withdraw the money you earned with FBS?

The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.
How to open an FBS account?

Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.
How to start trading?

If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.