ADX (Average Directional Index) indicator in Forex
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The ADX indicator (Average Directional Index) is one of the most useful trend indicators available. It is used widely because it provides us with two following factors:
- It tells us if the Forex market is trending
- It shows us how strong that trend is
In a sense, the ADX indicator is a measuring tool for up-trends and down-trends that we see in our charts on a daily basis. When used correctly, it allows us to get into trends early enough (after they are formed) and exit before the trend reverses back into the opposite direction.
ADX period setting
The standard or default setting for the ADX indicator is 14 periods. This is the exact period setting you should use if you are trading the 1 hour time-frame or above. If you are trading time-frames that are smaller than H1 then you should set the period to 10, or any other period you see fit.
Using the ADX indicator in Forex trading
When using the ADX indicator, we are looking for two factors:
- The cross over the 25 line – this indicates that a new trend is likely to happen
- ADX to rise as the trend progresses – this indicates that the trend is increasing in strength
Once the above two factors are apparent, we should be aiming to get into the trend. However, one thing you will NOT get from the ADX indicator is trend direction. For direction, you have to refer to your price chart. Just because the ADX is going up, it does not mean that prices are going up or that the trend is going long (higher). All that the ADX indicator shows us when it climbs is that the trend strength (defined by the price chart) is increasing.
As soon as the ADX indicator crosses over the 25 line a new down-trend appears in the chart.