How To Trade With ADX Indicator

The Average Directional Index or ADX is a technical indicator that measures strong or weak trends. It can either be in the form of a strong uptrend or a strong downtrend. This technical tool does not state the direction of the market but it describes the strength of the trend. We see in some charting software the presence of two lines while in others we three lines. The lines are the +DI and the –DI, with the DI connoting Directional Indicator. It is important to know that trading in accordance with these lines would lead to an eventual loss of money. Traders eventually ignore the lines.

This indicator is successful in identifying new trend as readings below 20 indicate a trending market, while it’s also normal to see a trending market with readings above 40.

The ADX indicator marks the start of a new trend. The longer we see the market range prior to the ADX breaking above 20, the more we see an upside potential for the trade. There are other cases where we find investors using the ADX as a signal for trend reversal when the ADX is above 40 and had a cross below the –DI a +DI lines. We can vividly look at a EURUSD 1-hour chart with ADX indicator on it on image below.

How To Trade With ADX Indicator

How to Trade the Average Directional Index

For the sake of some examples that would be cited on this manual, we have the light sea green ADX line, the yellow green +DI line and a wheat colored +DI line.

DI Line Crossover Strategy

The DI line crossover strategy is a method that’s employed by investors to trade this technical indicator:

+DI Represents of the strength of the buyers in the market.
-DI Represents of the strength of the sellers in the market.

This is a very simple strategy as when the +DI crosses above the –DI, it indicates that buyers are taking control of the market and that some investors are likely to go long on their position. The other situation is when the +DI line crosses below the –DI line, this implies that sellers are gaining control and some investors would go short. image below shows a chart of the EURUSD on a 1-hour timeframe with buy and sell points using the ADX crossover strategy.

How to Trade the Average Directional Index

Trend Reversal

The Average Directional Index can be traded using this method. The trend reversal allows the ADX to be traded when it is above both the +DI line and the –DI line and eventually turns lower. This is a significant alert that the current market trend is reversing and investors can position themselves appropriately. A vivid example is seen on the EURUSD 1-hour chart (img below).

ADX Trend Reversal

Conclusion

Traders depend on the ADX for trend reversal alerts and also for identifying range conditions. Investors are alerted by ADX during periods of changes in trend momentum, thereby managing risk properly. If you want the trend to be your friend, then ADX should be your closest pal.

ADX The Average Directional Index MT4 Indicators