The ADX (Average Directional Movement Index) indicator measures the general strength of a trend.
The ADX indicator displays three lines. The line that measures the value is generally black or white and graphs the history of a range between 0 and 100. The green DI+ line signals buys and the red DI- line signals sells.
What the range means
0-20 Flat market, no strong trend
20-30 A trend is developing
30-40 A strong trend is underway
50+ Price action has had a long trend
How to use the ADX indicator
As a general rule of thumb the idea is to enter a trade at the start of a trend and exit the trade before the trend reverses. The ideal time to open a trade is when the trend is developing between the ADX indicator values of 20-30. When the DI+ green line is above the DI- red line the market is trending up and only buys / long positions should be opened. The opposite is true of opening sell / short positions. When the ADX value is between 40-50 the open position should be closed or a trailing stop should be applied to the trade in progress.
The are many technical indicators that work in trending markets and only trending markets. Since the job of the ADX indicator is to identify a trending market it can be used to compliment or confirm other technical indicator signals. Simply put, if the ADX indicator is displaying a value of 25+ with a buy signal and another indicator is displaying a buy signal then chances are better that the trade will go your way if you enter a buy position.
The ADX indicator can also be used as a filter. It is commonly used as a filter for EA's to prevent risky trades from being opened. When used as a filter it will prevent trades from being opened in the opposite direction of its signals. It can just as easily be used as a manual forex trading system filter. The forex trader can simply check the ADX signal before opening his or her trade.
Our take on its effectiveness: The ADX indicator is a classic lagging indicator. It only accounts for the past results and uses no clever logic to predict future movement. Simply looking at the price action to see the current trend is just as effective.
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