The Average Directional Movement Index (ADX) strategy measures the forex market’s overall strength. When traders are able to identify the strongest trend, they are able to enter the market at ideal price levels. This helps them place long orders in strong bullish trends and short orders in strong bearish trends. In our article, we will learn about the top five ADX strategies that you can trade with!
What is ADX?
Average Directional Index or ADX is a technical analysis indicator that can determine if a market trend is strong or weak. It provides values between 0 to 100 for the same.
- A value between 0-25 indicates a weak trend.
- A value between 25-50 indicates a fairly strong trend.
- A value between 50-75 indicates a very strong trend.
- A value between 75-100 indicates an extremely strong trend.
The ADX indicator includes three different lines: the negative directional indicator (showing a downtrend), the positive directional indicator (showing an uptrend) and the ADX line (strength analyser).
Top 5 ADX trading strategies
1. 2-period ADX trading strategy
The 2-period forex trading strategy helps traders identify breakouts in the market and provides them with ideal price orders to long a trade after a bearish trend ends and reverses in a bullish breakout and short trades after a bullish trend ends and reverses in a bearish breakout. Whenever the 2-period ADX falls below the value of 25 and approaches 0, it indicates a bullish breakout since the market has trended downwards for some time already. On the other hand, whenever the 2-period ADX rises above the value of 75 and approaches 100, it indicates a bearish breakout since the market has already trended upward for some time.
2. Holy Grail trading strategy
The Holy Grail trading strategy combines the ADX indicator with a moving average to identify price pullbacks in a trending market. It considers a timeframe of 14-period and monitors the values provided by the ADX indicator.
- When ADX indicates a value above 30 and continues to increase, but the current currency pair prices retrace below the simple moving average (SMA) line, it indicates a continued uptrend expectation and signals traders to place long orders.
- When the ADX indicates a value above 30 and continues to increase, and the current currency pair prices also rise above the simple moving average line (SMA), it indicates a bearish reversal and signals traders to place short or sell orders.
The ADX indicator, when combined with the moving averages, indicates confirmed price trends. This means that when it is used with a currency pair’s price that is moving away from the SMA, it confirms a market pullback in the opposite direction of the current trend, indicating downtrend confirmation. However, when it is used with currency pair prices moving around or above the SMA, it indicates a confirmed bullish breakthrough.
3. ADX and Parabolic SAR strategy
Parabolic SAR is a technical indicator that determines the currency pair’s trend direction by placing dots above (downtrend indication) and below (uptrend indication) the candlesticks. ADX, when used with Parabolic Stop and Reverse, determines the predicted future market direction and its strength, enabling traders to place long and short orders accordingly. Together, they form a trend following momentum in which the ADX crossover provides market signals, and Parabolic SAR confirms the same.
- When the positive directional index line crosses the negative directional index line from above, it indicates an expected uptrend. Simultaneously, if Parabolic SAR indicates dots below the candlesticks, the bullish trend is confirmed, and traders are signalled to long the trade.
- When the positive directional index line crosses the negative directional index line from below, it indicates an expected downtrend. Simultaneously, if Parabolic SAR indicates dots above the candlesticks, the bearish trend is confirmed, and traders are signalled to short the trade.
4. ADX Price Divergence strategy
According ADX’s price divergence strategy, when a currency pair’s price increases in the market, ADX value should also increase and vice versa. However, in situations when the ADX value is rising but the currency pair prices are falling, or the ADX value is falling but currency pair prices are increasing, there is a divergence in the market, and ADX warns traders against trend trading.
- When the ADX line forms lower highs in the market, but the currency pair prices make higher highs, the divergence suggests that the previous bullish momentum is coming to an end and will be followed by a bearish divergence, signalling traders to short the trade.
- When the ADX line forms higher lows in the market, but the currency pair prices make lower lows, the divergence suggests that the previous bearish momentum is coming to an end and will be followed by a bullish divergence, signalling traders to long the trade.
5. ADX day trading strategy
The ADX day trading strategy is simple to follow and hence can be used by both beginner and expert traders. The ADX indicator is added to short-term charts in this strategy and the best ADX setting to be used is the 3-period setting to make the indicator more sensitive towards short-term price fluctuations. When we combine the ADX indicator with the currency pair prices fluctuating in trending or ranging markets, we can receive close to accurate price levels to enter and exit trades.
- When the ADX value rises above 50, and the currency pair prices rise simultaneously, it signals traders to enter long trades.
- When the ADX value falls below 50, and the currency pair prices fall simultaneously, it signals traders to exit trades or place short orders.
This is a simple strategy that only monitors the price movement of the currency pair and combines it with the ADX values. Hence, ADX is able to provide confirmed market signals if traders should enter or exit the current trend.
Trade with the ADX indicator to place trend-following orders
The ADX indicator helps determine if a trend is strong enough to be traded. It works well with all timeframes and hence is a useful indicator for both short-term and long-term traders. Sign up for a live trading account or try a demo account.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.