Riding the trend is one of the most profitable trading strategies you can have as it is a good way of producing high risk reward ratio trade and the best way to find out the status of the trend is to make use of the forex adx indicator.
So Why ADX Indicator?
If you have been reading my blog, you will know that I have written an article to help you identify the trend of the market using various forex trend indicators like the moving averages. The moving averages are still a good way to tell the trend but they are unable to give you a value for the trend and this is where the ADX indicator comes into play.
What Is ADX Indicator?
It is an indicator that is made up of a single line with value ranging from 0 to 100. You may think that it looks like an oscillator but it is uni-directional. Unlike the oscillator which tells you that the market is moving up when it is pointing up and the market is moving down when it is pointing down, the ADX is only meaningful when it is pointing up and that’s why it is uni-directional.
If you take a close look at the picture below, you will find that the adx will point up when you are in a good uptrend as well as a downtrend.
How to Use the ADX Indicator?
I personally use it to tell whether the market is trending or ranging. As stated in the earlier part of this post, the ADX has a range value from 0 to 100. When it is moving below the 25 level, it is telling you that the strength of the market is very weak. What usually happens at this time is that the market is in consolidation and will most probably be moving in a range.
When the indicator moves above the 25 level, it is telling you that the trend is strengthening and the larger the value, the stronger will be the trend. However to have a better understanding of the trend you are in, you need to combine the direction of the indicator together with its value.
Sign of a Strong Trend:
You are in a strong uptrend or downtrend when the ADX indicator is pointing up and moving above the 25 level.
Sign of a Weak Trend:
You are not in a strong trend when the indicator is pointing down and moving below the 25 level.
Other Uses of ADX Indicator
1) Divergence: Besides using the ADX indicator for telling the strength of the trend, you can also use the divergence of this indicator to warn you of possible retracement or reversal. If you have entered a LONG trade and you see the ADX making lower highs while the price make higher highs, this is a good time to exit your trade as a retracement or a reversal is going to occur.
2) Breakout Strength: You can also make use of this indicator to help you trade breakouts. The problem with most breakout traders is fake out which is the false movement of the market leading most inexperienced traders to enter a trade and then stopped them out by reversing the movement.
With the ADX indicator, you will now be able to check if a breakout is valid or not. When you see the price breaking out of a pattern or trend line, you can immediately check your indicator to see if it is pointing up and moving above the 25 level. A valid breakout will be formed when the ADX indicator is pointing up and moving above the 25 level and an invalid breakout will be the opposite.
I hope that you find this indicator useful for your trade and eventually integrate it into your trading plan. If you have other uses for the ADX, do share with us by commenting below. I hope that this blog will eventually become the place where traders share their knowledge and everyone can learn from one another.