Key takeaways to consider when using ADX in a trading strategy:
- ADX values above 25 indicate a strong trend.
- When ADX is rising, it means that the trend is getting stronger.
- When ADX falls, it means that the trend is losing strength.
- A reading below 20 generally indicates a weak trend or range-bound market.
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ADX will not solve all of your trading problems, but there is no better indicator with which to build a successful trading system.
It is a popular indicator among traders.
It is often used in confluence with other indicators to provide trade signals.
This guide will go over the ADX indicator and how it can be used as a trading strategy.
What is the ADX Indicator?
ADX or aka the best trend reversal indicator
The ADX indicator was developed by Welles Wilder.
It can be used to trade on currency pairs, commodities, and stocks.
But it can also be used for trading crypto – for all the crypto bros & gals out there.
It is a trend-following indicator designed to measure a trend’s strength rather than its direction.
The ADX is calculated using a formula that combines three separate indicators: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI)
ADX = 100 * (ATR/((+DI+(-DI))/2))
The +DI and -DI are used to measure the trend’s strength in a particular direction. A high +DI value indicates a strong bullish uptrend, while a high -DI value indicates a bearish strong downtrend.
- ADX Line is the Black Line
- DMI+ bullish momentum in Green Line
- DMI-: bearish momentum in Red Line
ADX can answer many of your concerns about when and how to trade.
It provides a solid framework for understanding the larger context of trade.
ADX will help with the following trading decisions:
- When is a new trend just starting to break out?
- When is a trend strong enough to buy on pullbacks?
- When is a trend getting weak and overbought?
- When is a trend reversing?
- When is a trend entering a consolidation?
How to Use the ADX Indicator?
We’ve covered the ADX indicator and how to use it extensively in our blog on identifying trend reversals.
- When the ADX is above 25, it indicates a strong trend and is likely to continue.
- Conversely, when the ADX is below 20, the trend is weak.
Use additional technical analysis tools.
Implement risk management strategies.
Combining the ADX with Other Indicators
The ADX is often used with other indicators to provide trade signals.
One common approach is to use the ADX with the Moving Average Convergence Divergence (MACD) indicator.
The MACD is a trend-following indicator used to identify trend changes and can be used to confirm trade signals generated by the ADX.
Another popular approach is to use the ADX with the Relative Strength Index (RSI).
The RSI is a momentum indicator used to identify overbought and oversold conditions.
When the RSI is above 70, it indicates that the security is overbought, and traders may want to consider taking profits or looking for short-selling opportunities.
Conversely, when the RSI is below 30, it indicates that the security is oversold, and traders may want to consider buying or looking for long trade opportunities.
The ADX indicator is a powerful tool for traders looking to measure a trend’s strength and identify entry and exit points in the market.
It can be used on its own or in confluence with other indicators to provide trade signals.
By understanding how to use the ADX, traders can better identify trend strength and improve the accuracy of their trades.
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