So, the ADX line will rise during both a strong uptrend and a strong downtrend. When the ADX is above 25 like in the image below , the trend is strong enough to apply trend following strategies. However, traders who want to get faster signals often use the 20 ADX threshold as well. When ADX is below 25 , the market is in the consolidation stage. The image below portrays this well and, as we can see, there is a lack of a trend.

With trends involving ADX below 25, we can no longer apply trend trading strategies but the strategies for ranging markets.

The cross between the two DIs, together with the ADX line that is higher than 25, resulted in an excellent bullish move. ADX should only be used with higher time frames because it tends to give false information on lower time frames. The ADX has a tendency to lag and the volume meter is generally very slow, which can lead you to enter the market too late.

The strategies used with the traditional ADX alone are insufficient and can offer a lot of false signals, but the ADX indicator can be used with other tools to obtain better signals. ADX can serve as an example of how you can apply the moving average MA to a volume indicator. In the example below, we removed the ADX line 25 and added the MA, keeping the period at As ADX does not perform well during market consolidation, it would take a lot of time to go below that line and inform the trader that it is not a good time to trade.

That is why traders take many losses with ADX alone when the market goes sideways. Although this combination is not the best tool you can use, ADX has proved to perform better after the changes have been made. OBV on-balance volume shows whether the volume in the market is flowing in or out of the instrument. The moving average MA of is applied to determine is the momentum in the market is bullish or bearish.

This strategy, however, always requires higher time frames as well as an instrument with some volatility and a high ATR. Needless to say, traders must always use risk and money management skills to protect their trades from false signals and limit any potential losses.

Wait for the reading to get the ADX of 25 to know you are in a strong trend and that the trend is likely to develop. Use the last 50 candlesticks to determine the trend. Therefore, if the price is heading lower during the last 50 candlesticks, you are in a bearish trend.

We will ignore the typical rule for using the Relative Strength Index RSI as we normally interpret the RSI reading below 30 as an oversold market and a reversal zone. To get an entry signal, use the same settings for both RSI and ADX. We will also add a stop loss for maximum protection. To determine the best location for your stop loss, find the last high of ADX before the entry.

Then, identify the corresponding high on the price chart from the ADX high and place your stop-loss point there. We will take profit after the ADX indicator breaks back below 25, which tells us that the strength of the prevailing trend is decreasing. You can also consider RSI going back into the normal zone as the exit point. Unlike the traditional ADX indicator, which makes it hard to see where the market is headed, ADXm clearly shows both positive and negative ADX half-waves colored parts of the line in the chart below.

ADXm uses the same method as the traditional ADX. We will use a reading of 20 to 25, depending on the time frame. The original and this improved version differ with regard to price options. While the traditional ADX offers no price options i.

it uses fixed close, high, and low for circulation , ADXm allows traders to use three prices — the price for close, high, and low. Still, there are also many similarities between the two e.

the results, if default parameters are used. The original ADX uses SMMA i. running MA or Wilders EMA , while DMI Oscillator allows traders to experiment with the other types of averages as well.

The improved version also lets traders smooth the results of the oscillator. Moreover, it offers three different color options — on levels cross, zero cross, and slope. Traders seem to love DMI Oscillator because they can apply different strategies scalping, swing trading, short term trading, binary trading, etc. on different time frames and regardless of candle behavior. The ADX indicator is great for determining trend strength — both bulls and bears at the same time.

While it is good for identifying trending conditions, the traditional version of this tool may lag quite a lot. Not only does it often cause traders to enter trades too late but it also gives too many false signals, which then result in losses. The daily time frame is the best option for using the ADX because it offers the least amount of inconsistency and incorrectness. The best profits come from catching strong trends and, with the right ADX strategy, you can accomplish your trading goals.

It is extremely important to note that ADX in particular requires traders to rely on money management and risk management — especially with the original version. Although you can use it independently, in order to understand it, you have to know what a DMI indicator is. This consists of two lines, namely Plus DI and Minus DI. When the former crosses above the latter, the position is said to be long, and when the opposite occurs, the position is said to be short.

However, frequent and sudden changes in the price direction may occur if only Plus DI and Minus DI lines are used. In order to negate this, we can use it in combination with ADX. Using the Parabolic SAR indicator, you can follow the dots in a trend up to the point where a reversal occurs.

This indicator is mostly used for stop placement rather than assessing in which direction the trend is moving. By the time the dots almost reach the price action, the speed of the SAR is considerable.

Thus, the stop level gets activated, indicating the traders to get out of the long position. As we can see, in a market with a pronounced trend, PSAR is a great indicator for a trader, providing them with robust trading signals.

When the trend increases in strength, the distance between the prices and the Parabolic diminishes, which is favorable for us. Hence, when the PSAR lies near the prices and the pivot point ADX setup gets formed, you have all you need to make a great trade. The smallest countertrend movement at this point would go beyond the Parabolic and indicate a chance to make an entry into the market.

This indicator will generally arrive prior to the decline of the ADX. If you want a pattern that can signal a vital trend reversal, then this is ideal for you. With the PSAR turns over to the other side, it is a good time to make an exit. PSAR can be used for initial stop placement and additionally for trailing the stop with the progress of trade.

Provided the main trade criteria are not endangered according to ADX indication, a principal resistance or support level can act as a stop-loss. Among the main advantages of ADX and the trading strategy based on it is that huge gains can be made in two directions through the reversal of position when a drastic trend reversal occurs in the market.

This phenomenon is depicted in the above chart. The general rule is to continue the trade up to the point when the Parabolic trailing stop is removed. You should keep the trade going, notwithstanding the minor shifts in DI and ADX line positions. Nevertheless, if the value of ADX lies beneath 25 and the DI lines undergo a reversal in the opposite direction, as shown in the chart above, you should close the position manually. The advantage of this strategy is that you can filter an entry and foresee a good time to make an exit.

The downside is that although ADX and PSAR work very well together, the former is a weak link because it can show a particular signal during a trade and switch to another later on.

Thus, we saw how you can combine PSAR and ADX to make a good entry and exit in your trade, place stop-losses, and manage the open trade.

Welles Wilder was a prolific designer of trading indicators that have survived the test of time. With his broad experience with the markets, Wilder knew that the key to trading is getting the context right. Wilder designed the Average Directional Index ADX as an indicator to interpret market context. These six trading strategies will give you a rounded view of how the ADX works. They will also show you how it performs with other common trading tools.

You should already be familiar with the ADX to follow the strategies below. If you have never heard of this indicator before, click here for a short primer by Investopedia before proceeding.

The following interpretation is valid only if the ADX is above a threshold commonly set at 20 or 25 :. This system is a basic setup. Do not expect it to be profitable without refining it with other tools like price action and volume.

Under such situations, relying on DI crossovers for entries might not make sense. According to Wilder, you can get a better entry if you use the system in conjunction with the Parabolic SAR. As you can see in Point 4 above , when you get a nice parabolic swing, the Parabolic SAR can even guide your exit from the market. You can find more examples in this article by FX Trading Revolution.

The ADXR is a smoothed ADX. In any approach that uses the ADX, you can opt to replace it with the ADXR. This substitution will filter out the more aggressive signals. It offers earlier signals than observing only the ADX. This concept is similar to the ADX slope method discussed here. Earlier, I spent some time investigating the behavior of common indicators with extreme parameters. The study led to the development of this 2-period ADX strategy.

Here, we are not using it to find trends. Instead, we apply it to find imminent breakouts like the one shown below. Click here for the full write-up on the 2-period ADX. A classic strategy from Linda Bradford Raschke. The Holy Grail combines the ADX with a moving average to find pullbacks using price action. For more chart examples, refer to our review of the Holy Grail strategy. In this strategy, the fundamental intuition is that as a trend develops, the ADX value should rise.

It is similar to the divergences you see in oscillators like the RSI and MACD. However, one crucial difference is that the ADX is not directional on its own. This attribute directly affects how you look for ADX price divergences.

I find that ADX divergences work better if the first ADX crest is above This chart shows how the ADX formed lower highs as the bearish trend continued. These lower highs implied that the bearish trend might be losing momentum. You can find another example of ADX divergence in the last chart of this article by Brandon Wendell.

These strategies should give you a solid foundation for analyzing the market with the ADX. Beyond these setups, as a price action trader, I find the ADX helpful in market scans. For instance, through a scan, the ADX points out trending markets. It provides a short list for me to zoom in to perform detailed price action analysis. Your email address will not be published. Download for free now.

Leave a Reply Cancel reply Your email address will not be published. Trading Setups Review Support Us Contact Us About Us Privacy Policy Affiliate Disclaimer Full Risk Disclosure. Learn More Day Trading With Price Action Course TSR Trading Guides Trading Setups Trading Articles Trading Books Site Map.

Learn a new powerful price pattern today!

Now look at what happens when the ADX indicator gets into higher territory, generally above Regards, Edward. Trading Setups Review Support Us Contact Us About Us Privacy Policy Affiliate Disclaimer Full Risk Disclosure. The Absolute Best Forex Indicators and How to Combine Them. Trying to trade according to these two lines is your surest way to lose money-and its even caused more confusion. Then, identify the corresponding high on the price chart from the ADX high and place your stop-loss point there.

Categories:

• Forex Brokers
• Binary Options
• Forex Bitcoin
• Forex
• Binary Options online