Welcome to our Free Course
Enhance your trading knowledge by studying our legendary free online program!
  • Beginner
  • Intermediate
  • Advanced
  • Completion
  1. Beginner
    Early Stages For Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
  3. Margin & Leverage
    2 Topics
  4. Intermediate
    Identifying Scams
    2 Topics
  5. Brokers for Beginners
    5 Topics
  6. Technical Analysis
    13 Topics
  7. Advanced
    Using Indicators
    6 Topics
  8. Technical Analysis (Part 2)
    8 Topics
  9. Market Structure
    5 Topics
  10. Fundamental Analysis
    9 Topics
  11. Completion
    Risk Management for Beginners
    8 Topics
  12. Psychology for Beginners
    7 Topics
  13. Personal Psychology Questions
    2 Topics

Average Directional Index (ADX)

The ADX is visually the simplest momentum indicator, which is why it’s so popular among forex traders willing to determine the strength of a trend. However, it’s actually the most complex of the four when it comes to calculations used to determine its value. In fact, its formulas are so sophisticated that we won’t even bother explaining how the ADX is formed, but we’ll just mention that the indicator’s main purpose is to assess the strength of a trend.

The ADX also represents a line that fluctuates between 0 and 100, but its formulas involve multiple lines.

On a side note, the ADX was first introduced by J. Welles Wilder Jr., who presented it in his 1978 book, “New Concepts in Technical Trading Systems,” which also discusses the RSI and the Parabolic SAR.

 

How to Use ADX?

Unlike the previous three indicators, the ADX doesn’t care about the direction of the trend at all. It only shows whether an existing trend is weak or strong. Thus, a reading below 30 suggests that the price is moving within a horizontal channel. If the ADX breaks above 30, it suggests that the price is trending, and the higher the ADX line goes, the stronger is the trend, whether bullish or bearish. If the ADX line is above 50, then it suggests a very strong trend, and if it’s above 75, then it’s an extremely strong trend.

One of the best ways to use the ADX indicator is to wait for the currency price to break above a resistance or below a strong support and then confirm the newly forming trend with ADX. For example, let’s say that we’ve had a horizontal channel. If the price breaks above its resistance while ADX is gradually increasing, we can confirm that the newly formed uptrend is gaining traction, and we can go long.

The ADX can also be used to better understand when to exit the market. For example, if the ADX is crossing below 50, it means that the current trend is weakening, and it may be time to exit the market, though this should be ideally confirmed by other indicators as well.