Average Directional Index: How to Use The Trend Strength Indicator?
Average Directional Index (ADX) effectively identifies the strength of an ongoing market trend, which can help you in taking ideal entry or exit positions. Developed by popular commodity trader Welles Wilder, ADX was mainly used for trading commodity futures but it can be just as effective for other assets as well. In this article, we take a deep dive into the ADX indicator and how you can trade with it.
What is the Average Directional Index?
The ADX is a strength indicator that measures how strong or weak a particular market trend is in forex trading. The indicator enables traders to enter long or short trades based on the trend's strength in the market. The ADX is essentially the average of all the price range values in a 14-period time frame. It finds out if there is an uptrend or downtrend through negative and positive directional index lines.
- The negative directional index (-DI) measures how strong a downtrend is
- The positive directional index (+DI) measures how strong an uptrend is
The higher the slope of the negative and positive directional index line, the stronger the trend.
How is the Average Directional Index calculated?
1. To calculate ADX, you need to start by calculating Directional Movement Index (+DM and -DM), along with Average True Range (ATR) for the specific period. Usually a fourteen day period is used + DM = Current High - Previous High -DM = Previous Low - Current Low Take a note of the following:
- Use +DM whenever the (Current High price – Previous High price) is more than (Previous Low price – Current Low price)
- Use -DM whenever the (Previous Low price – Current Low price) is more than the (Current High price – Previous High price)
- The true range of the first 14 observations will be the first 14 true rage price readings
- Next true range values will be the first true range values – (previous 14 period true range value/ 14) + current true range
2. Smoothen out the 14-day period averages for +DM, -DM, and ATR
3. Next, calculate the directional indexes by using the following formula +DI = [(Smoothed + DM)/ATR] * 100 -DI = [(Smoothed - DM)/ATR] * 100
4. To get the ADX, you need to calculate the DX values for at least 14 periods, and then smoothen out the results with all DX . Directional Index (DX) = absolute values of [(+DI - -DI)/(+DI + -DI)] * 100
5. Here’s how you can calculate the ADX for 14 periods ADX = [(Prior ADX * 13) + (Current ADX)]/14
How is the Average Directional Index calculated?
ADX's reading above 25 signals a strong trend, and any reading below 20 signals a weak trend. Whenever the increasing ADX value starts declining, it suggests that the existing trend is coming to an end. If an uptrend is ending, it signals traders to exit the trade, whereas a downtrend ending signals traders to enter new trades. On the other hand, if the ADX's value has been low for some time and starts increasing gradually, it signals traders that the existing trend is strengthening and that they should trade in the direction of the trend. During an uptrend, it sends traders a signal to enter the market, and during downtrends, it signals traders to exit the market.
Top Average Directional Index Strategies
1. Directional Index Crossover Strategy
The Average Directional Index consists of the ADX line and two other directional indexes (+DI and -DI). During a downtrend, at the point where +DI and -DI cross each other, traders receive a sell signal in the market to trade along with the trend. When there is an uptrend, this crossover sends a buy signal to the traders.
2. Uptrend and Downtrend Confirmation Strategy
This is a trend continuation strategy that confirms an ongoing trend in the market.
- Entry orders are placed when an uptrend is confirmed
- Exit orders are placed when a downtrend is confirmed
When the ADX shows a reading of 25 or above in an uptrend, it indicates a strong trend continuation and signals traders to place buy orders in order to trade with the existing market trend. However, during a downturned, when the ADX shows a reading of 25 or above, a falling market is confirmed that sends sell signals to the traders.
3. No Trend Zone Strategy
The No trend zone strategy allows traders to identify the area in the market which isn’t following any strong trend. It's recommended to not trade in these specific zones since they don’t follow any trend or potential path. Instead, traders should wait for a breakout to place buy or sell orders. In a ranging market, where a currency pair trades for a long time in between a particular price range, the ADX helps in identifying when there is an absence of a strong trend. This helps traders avoid placing orders in a situation of a weak trend.
4. +DI and ADX Long Uptrend Strategy
The No trend zone strategy allows traders to identify the area in the market which isn’t following any strong trend. It's recThe +DI and ADX long uptrend strategy is a long strategy that helps traders identify potential price levels where they can place long orders. During an uptrend, when the ADX shows a reading of 25 and above, crossing over with the +DI line sloping upwards, it sends strong buy signals to the traders as an uptrend confirms. On the other hand, if the ADX's reading falls below 25, and it crosses over with the -DI line, it indicates that a trend is weakening and signals traders to place sell orders to exit the market.
Use Pivot Points to identify multiple support and resistance levels
With the help of the ADX indicator, traders can make market exit and entry decisions accordingly. Open a trading account with Blueberry Markets to experience a seamless trading process with advanced tools like the MetaTrader to support you. Sign up for a live trading account or try a risk-free demo account today.
What Are Bear and Bull Power Indicators?
Bear and bull power indicators in forex measure the power of bears (sellers) and bulls (buyers) to identify ideal entry points.
How to Trade With The On Balance Volume Indicator
The On Balance Volume (OBV) indicator analyses the forex price momentum to measure the market’s buying and selling pressure.
How to Use The Alligator Indicator in Forex Trading
The Alligator indicator can identify market trends and determine ideal entry and exit points based on the trend’s strength.
How to Use Inside Bar Trading Strategy
Inside bar trading offers ideal stop-loss positions and helps identify strong breakout levels.
What is the Martingale Trading Strategy in Forex?
The Martingale trading strategy increases the possibility of winning a trade in the forex market.
How to Use The Forex Arbitrage Trading Strategy
Forex arbitrage trading strategy allows you to profit from the difference in currency pair prices offered by different forex brokers.
The Beginner’s Guide to MQL5
MetaTrader, as a platform, has built-in functions that assist in technical analysis and trade management while also allowing traders to develop their own indicators and trading strategies.
How to Use DeMarker Indicator For Forex Trading
Every trader needs to know precisely when to enter or exit a forex market.
How to Use The Accelerator Oscillator For Forex Trading
The Accelerator Oscillator indicator helps detect different trading values that protect traders from entering bad trades.
A Forex Trader’s Guide to Awesome Oscillator
When you understand market momentum, you can better identify market reversals.
What is Money Flow Index?
The Money Flow Index can analyse the volume and price of currency pairs in the market.
What is The Ichimoku Kinko Hyo Indicator?
The Ichimoku Kinko Hyo indicator provides traders with the market’s current momentum, direction and trend strength.
Top Pullback Trading Strategies
Pullback trading strategies provide traders with ideal entry points to trade along with the existing trend.
What is High Wave Candlestick?
The High Wave Candlestick pattern occurs in a highly fluctuating market and provides traders with entry and exit levels in the current trend.
What is the Parabolic SAR indicator?
Identifying market trends becomes easier with the Parabolic SAR indicator as it provides the ideal entry and exit signals in strong trending markets.
What is Currency Correlation?
Currency correlations help trade multiple currencies in the forex market by identifying the market trends of each currency pair.
Price Action Trading Strategy
A Price Action Trading Strategy helps find ideal entry and exit points depending on expert opinions, news announcements, or technical indicators.
Average True Range
Average True Range (ATR) helps in identifying how much a currency pair price has fluctuated. This, in turn, helps traders confirm price levels at which they can enter or exit the market and place stop-loss orders according to the market volatility.
Moving Average Crossover
The Moving Average Crossover is a valuable tool to find the middle price-point of a trend in forex trading. When currency prices crossover their current moving averages, it helps traders identify the favorable buying or selling points for the currency.
What is the Bullish Engulfing Candlestick?
Bullish Engulfing Candlesticks helps in identifying an uptrend reversal in the market. This candlestick pattern stands out because a trader does not need to wait until the entire pattern is completed to enter a trade.
How To Trade The Gartley Pattern
The Gartley pattern helps identify price breakouts and signals where the currency pairs are headed. The pattern is also widely used in the forex market to determine strong support and resistance levels.
How to Trade Forex With NFP V-Shaped Reversal
A Non Farm Payroll (NFP) V-shaped reversal refers to a sudden increase or decrease in the currency pair prices right after an NFP report is released.
Candlestick Patterns: Top Candlestick Charts Every Trader Should Know
Candlestick patterns depict the price movement of assets in a graphical manner. Candlestick patterns also enable traders to predict market behaviour.
What is the Evening Star Candlestick Pattern?
Evening Star Candlestick Patterns help traders identify ideal exit levels in the forex market by signalling a slowed upward momentum and strengthened downward momentum.
How to Use Ichimoku Cloud in Forex?
The Ichimoku Cloud provides a clear market trend direction to the traders and helps them make market decisions accordingly.
Pennants Pattern: How to trade bearish and bullish pennants
Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points
How to Trade Forex With Renko Charts
Renko Chart is a technical indicator that provides strong market trend directions by filtering out minor price movements
What are Ascending and Descending Triangle Patterns?
The Ascending and Descending Triangle Patterns confirm continued trends in the forex market.
How to Identify Cup and Handle Pattern in Forex Trading
The Cup and Handle Pattern is a technical price chart that forms the shape of a Cup and a Handle, which indicates a bullish reversal signal.
What is the Head and Shoulders pattern?
The Head and Shoulders pattern is a trend reversal indicator that predicts bullish to bearish and bearish to bullish reversals in the forex market.
What is the Hammer Candlestick Pattern?
Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly.
What is The Opening Range Breakout Strategy
The Opening Range Breakout (ORB) Strategy involves taking forex positions when the currency pair prices break below or above the previous day's high or low
Morning Star Indicator
The Morning Star Indicator helps identify strong trend reversals in the forex market and enables you to take trade position entry decisions accordingly.
How Does Stochastic Indicator Work in Forex Trading?
Stochastic Indicator helps traders identify overbought and oversold market conditions that substantially lead to market reversals.
Favourite Fib Fibonacci Retracement
Fibonacci retracement strategies help traders identify the market's support and resistance levels, trend reversal points, and entry and exit decisions.
Heikin Ashi Candlestick Pattern
The Heikin Ashi Candlestick pattern is almost the same as the traditional candlesticks, with one big difference—the former is an averaged out version of the latter.
Multiple Time Frame Analysis in Forex
By monitoring different currency pairs in different time frames, you can make your Forex trades more successful and profitable.
What are Bollinger Bands?
The Bollinger bands can help identify overbought and oversold market conditions, protecting you against placing any orders that could lead to losses.
Andrew's Pitchfork Trading Strategy
Andrew's Pitchfork is a Forex trading strategy that can predict protracted market swings and help you in identifying potential market trends that can indicate potential exit and entry points.
Fibonacci retracements are one of the most popular methods for predicting currency prices in the Forex market. Predicting upward or downward market movement can help traders with accurate price analysis for exiting or entering the market.
Trading in Volatile Markets
Forex volatility is the measure of how frequently a currency's value changes. A currency either has high volatility or low volatility depending on how much its value deviates from its average value.
The ABCD pattern
One of the most classic chart patterns, the Forex ABCD pattern represents the perfect harmony between price and time.
The Bearish Gartley Pattern
The Bearish Gartley pattern was introduced in 1935, by H.M. Gartley in his book, “Profits in the Stock Market”. The pattern helps Forex traders in identifying higher probabilities of selling opportunities.
The Bullish 3 Drive pattern
The Bullish Three Drive pattern in Forex trading is a rare pattern that gives traders information about the Forex market's potential at its most Bearish point, and in turn, suggests probabilities for a market reversal.
What is the MACD Indicator?
The Moving Average Convergence Divergence (MACD) indicator helps traders quickly identify short-term trend directions and reversals in the forex markets. You can use the MACD indicator to determine a currency pair price trend's severity and measure its price's momentum and even identify the bearish and bullish movements in the currency pair prices.
Master risk management and
become an expert forex trader.
Move on to the advanced course.
Guide to Forex
Enter your details to get a copy of our
Start a risk free
News & Analysis
Catch up on what you might
have missed in the market.