The ADX indicator may be a widespread trend indicator and it provides info concerning momentum and trend strength.

In this article, we will dissect the individual components of the ADX and explore
step by step how to use them to make sense of charts and find trading opportunities

The ADX indicator line

As you’ll most likely apprehend, the ADX indicator comes with 3 lines: the general
ADX line (the black line in our examples) and also the 2 DI lines (green and red lines). We will first look at the ADX line.

Essentially, the ADX line measures trend strength and a rising ADX implies that the trend is gaining strength,
a falling ADX shows a trend that’s losing momentum or reversing and a flat ADX shows a sideways vary.
What is also important to know is that the ADX is non-directional which means that it
does not give any information about the direction of the trend. When the ADX goes up,
all it means is that the trend is gaining strength – this can then signal both a bullish or bearish trend.

The two screenshots below show this nicely and the ADX rises both during the uptrend (first screenshot) and during the downtrend (second screenshot).

Finally, we tend to should mention the brink level of the ADX. As you can see
in the screenshots below, we tend to plan a vertical line at the ADX window at the twenty.00 level.
The 20.00 level acts as a tiebreaker: if the ADX is below the twenty.00 level, the worth is during a vary or
in a terribly weak trend and only if the ADX breaks higher than the twenty.00 level, it signals a strong trend that
is likely to continue. In the screenshot below we tend to marked the primary time the ADX
breaks above the 20.00 level and then when the ADX broke back below the 20.00 level and signaled that price has lost the momentum.

 

 

The DI lines

The second part of the ADX indicator square measure the 2 DI lines that square measure sometimes color-coded (red and inexperienced in our example).

The DI lines offer directional info and that they additionally live trend strength.
Before we get into chart analysis, it’s important to understand how those green and red DI graphs are calculated –
but don’t worry, we’ll keep it simple. The only thing you should remember is that the DI lines compare the absolute

candle highs and the absolute lows of candles. Here are a few scenarios:

Green DI rises = the high and also the low square measure on the top of on the previous candle
Red DI rises = the high and the low are lower than on the previous candle
For an inside bar, the DI is 0 because both the high and the low fall into the previous candle and have no direction
On the screenshot below, we tend to set the DI amount setting to
1 which suggests that the indicator simply compares the 2 most up-to-date candles.
This is a decent method of understanding the DI calculations quickly. Keep in mind,
the DI just looks at the absolute high and the low (not the candle body).

 

The DI crossover signal

When the DI lines cross each other, they give a signal; when the green line crosses above the red line,
it means that the highs and lows of the previous candles are both moving higher which confirms an uptrend.
When the red DI line crosses above the green DI line, it shows that over the past candles,
the price has been moving down and the lows and highs are going lower.

In the screenshot below we can see this nicely. First, the ADX line crosses above 20
(first black vertical line) however, at now, the value was in an exceedingly vary. Then, things turned
around and the green line broke above the red DI line and the ADX started to pick up again.
The uptrend then gained momentum because the ADX was informed up and therefore the inexperienced DI line stayed on top of the red DI line.

Once the red DI line crossed above the green line, the trend was over (red vertical line).
You can see, the first ADX cross didn’t provide a strong signal but on the second one,
when the ADX started to inform upwards and therefore the DI lines crossed at the same time, it signaled a robust trend.

 

More ADX indicator chart studies and trade examples

Now let’s connect all the dots and appearance at 2 markets and explore however the ADX indicator will assist you to form sense out of those charts.
In the AUD/NZD chart, there were 5 ADX signals and we marked each with a vertical line and an arrow indicating the direction of the signal.

You can see that the primary signal came a small amount late and therefore the ADX crossed twenty once the value had been rallying already and at that time,
the DI lines were very wide apart already; ADX signals are usually stronger when the DI crossover and the ADX 20-line-break happen at
the same time (or relatively close).

The following signals would have given better entry opportunities but you can see that it’s important to have effective profit-taking and/or trailing stop methodology as a result of not all signals can give entries into long trend-following trades.
As with each system, you have to learn how to maximize winners and cut losses and small profits effectively.

 

 

 

The NZD/USD chart shows vi totally different signals and that we can bear them one by one:

1) comparatively early long entry into a good rally. Once the ADX hooked and turned down, the price also started to reverse – the “ADX hook” is a good exit signal.

2) The ADX broke above 20 and gave a short signal but the price immediately turned around and went back below 20.
In such a state of affairs, a bargainer should be quick with cutting his loss.

3) a decent short signal into a good pessimistic trend. Staying in the trade would have been the real challenge
here because the ADX showed the hook so unbroken on commercialism lower.

4) associate degree early long entry even as value stony-broke on top of the moving average with sensible profit potential.

5) excellent long signal into a robust optimistic market part.

6) Another sensible short chance into a robust downtrend. The ADX hooked once the value stopped its fall and entered the consolidation.

 

 

 

As you’ll be able to see, the ADX indicator, just like any other indicator, does not provide 100% accurate signals but a trader who can find ways how to maximize the profitable opportunities whereas managing the unsuccessful signals will most likely observe the use of the ADX indicator.
Let’s recap what we have learned about the ADX:
The ADX indicator has three graphs: the ADX line and 2 DI lines
The ADX indicator could be a trend and momentum indicator
The ADX line measures trend strength, however, doesn’t give info regarding the direction
Once the ADX line crosses on top of twenty, it signals a strong trend
The two DI lines analyze optimistic and pessimistic candles
The DI lines compare absolutely the highs and therefore the lows of candles
When the to DI lines cross, it gives a signal
When the green DI line is above the red one, it signals that the market is trending higher (and vice versa)

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