Average Directional Index Indicator

Average Directional Index Indicator

Pinpoint the current strength of a trend with the help of ADX indicator for MT4. Accurate buy/sell signals. Download for free.

The Average Directional Index also known as ADX is a technical indicator that determines trend strength.

The indicator is an average of increasing price range values.

This guide will dig deeper into what the ADX indicator is and how you can trade with it.

What is an Average Directional Index Indicator?
J. Welles Wilder developed and explained ADX in his book New principles in technical trading methods.

Wilder developed the indicator for daily commodity charts, but it can also be utilized in other markets.

The indicator uses the +DMI and -DMI lines, along with the ADX, to measure the strength of price movement.

The ADX can be plotted using a single line with values ranging from 0 to 100. This indicator is non-directional, recording trend strength regardless of the price direction. The ADX, in general, is the ultimate trend indicator.

ADX calculations are based on the moving average of price action. Typically, the oscillator consists of three distinct lines. These are used to determine whether a trade should be taken long or short or you should avoid the trade.

Essentially, the Average Directional Index can be used to forecast whether a market is trending or not. This prediction aids traders in deciding whether to use a trend following system or a non-trend following strategy.

How to use the Average Directional Index Indicator?
The indicator’s main purpose is to assist you in determining how strong the current trend is.

The rising of the positive directional indicator (+DI) indicates the strength of the trend. The strength of a downtrend, on the other hand, is indicated by the negative directional indicator (-DI).

Wilder proposed that when the ADX is above 25, there is a significant trend, and when it is below 20, it’s a signal that there is no trend.

When the ADX begins to fall from high levels, it’s a sign that a trend is coming to an end.

If the ADX falls, it may indicate that the market is becoming less directional and that the present trend is waning. As the trend changes, you may wish to avoid trading trend methods.

A crossover signal between the +DI and the –DI is also useful. When the +DI line goes above the –DI line and the ADX exceeds 25, it is considered a buy signal. When the –DI crosses above the +DI, and the ADX rises over 25, traders often go short.

Average Directional Index Indicator trading strategy
If the +DI is higher than the -DI, the market is normally in an uptrend, and you can go long. If the -DI is higher than the +DI, it indicates a downtrend.

ADX buy setup
+DI must cross above the –DI
Wait for the price action to turn bullish
Place a stop-loss near the recent low
Exit when the trend changes or when the +DI dips below the –DI

ADX sell setup

-DI should cross above the +DI
Wait for the price action to turn bearish
Set a stop-loss near the recent high
Exit when the trend changes or when the –DI dips below the +DI

Conclusion
ADX is a helpful tool for determining the overall strength of a trend. Like any other technical indicators, you should combine the ADX with other indicators to confirm the direction of the trend.