ADX indicator, also known as the Average Directional Index, is an important technical analysis tool. It assists investors in recognizing the direction of market trends and assessing the strength of those trends. To understand better, let Forex Trading explore the nature of ADX and how to use it in trading on the foreign exchange market.
Overview of ADX indicator
Currently, businesses are commonly using ADX indicators to analyze price fluctuations. So what is Indicator ADX?
What is the Average Directional ADX Indicator?
Average Directional Index (ADX) is a term in forex used to measure the strength of trends in the market. ADX only focuses on the strength of trends instead of determining their direction. People often use ADX to analyze whether the market is in a dynamic period, or has begun to form a new trend.
The fluctuation range of ADX is usually from 0 to 100. As the ADX value increases. This shows that the market trend is getting stronger. Conversely, if the ADX indicator falls below the 20 level, the current trend is considered weak.
Meaning of ADX indicator
By using the ADX indicator, traders can identify price trends.
- When ADX crosses 25 and +DI crosses above -DI, the uptrend is evident.
- Conversely, when ADX crosses 25 but -DI crosses above +DI, the downtrend is deep.
The ADX indicator also evaluates the strength of the trend.
- When ADX is below 25, the market trend is weak; above 25, strong trend.
- The maximum ADX is 100, and when it is between 75 and 100, the trend is very strong.
Additionally, the indicator also provides trading signals.
- When +DI is greater than -DI and ADX crosses 50, traders should look for a buy point, because the price is rising sharply.
- On the contrary, if +DI is less than -DI and the ADX indicator exceeds 50, the price falls sharply, and traders should look for a selling point.
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What is the formula to calculate the ADX Indicator?
The ADX index has two positive and negative directions, helping investors identify strong or weak trends. On the chart, ADX moves from 0 to 100, with the 25 threshold dividing the trend.
- The ADX indicator range from 25 to 50 shows a strong trend
- From 50 to 75 shows a very strong trend
- Between 75 and 100 shows a super strong trend
Investors can rely on that to determine whether the stock is in the overbought or oversold zone. ADX formula in forex:
ADX = [MA ((+DI) – (-DI)) / ((+DI) + (-DI))] x 100
With:
- DI is sunflower
- DI is the negative direction
Calculating ADX is not complicated, but it is necessary to determine the parameters of directional movement in advance. If the price increases, DM is +DM; if decreasing, DM is -DM.
How to technically analyze ADX Indicator to determine price trends
Below is the ADX Indicator technical analysis that Forex Trading has compiled.
Use the ADX index to determine the trend
The ADX index helps traders distinguish the strength of market trends, thereby making trading decisions.
Based on ADX value:
- 0 – 25: Market is stable (weak)
- 25 – 50: Strong trend
- 50 – 75: Strong increase
- 75 – 100: Extremely strong trend
Combine with DMI to enter orders
When combining the ADX line with the + DI and – DI lines, we can determine buying and selling positions. ADX above 50 shows a strong trend.
- If + DI crosses – DI from below or stands above – DI, open a long position.
- Conversely, open a short position when + DI cuts – DI from above or + DI stands below – DI.
Use the ADX indicator to determine when to close orders
When the ADX indicator begins to fall below 50, the forex market may enter a formative state or have no clear trend, so this is the time you should close your profits or exit the position.
How to use the ADX indicator in trading
Using the ADX indicator effectively requires a combination with other technical analysis tools such as RSI divergence. Here are some ways to use Indicator ADX :
Use ADX to confirm the reliability of trading signals
Usually, when a strong price increase is detected, the ADX index continuously increases. Investors often use ADX in combination with +DI and -DI to evaluate its trend and strength, thereby determining the reliability of trading signals. When +DI and -DI intersect, the trading signal becomes reliable if ADX remains at a higher level than normal.
Use ADX indicator to identify groups of indicators and tools
The ADX index is applied to classify suitable indicators and technical tools based on their value. If ADX is below 25, the market is not trending or weak. If ADX is above 25, the market is trending strongly. In this case, a lagging or trend-following indicator is most effective.
Use ADX indicator to identify trends
ADX Indicator in determining trends will have the following methods:
- When ADX is in the range of 0-25, the market is in a trendless or weak state, often accompanied by a sideways phase.
- When ADX is between 25-30, the market is moving into a new trend and its intensity is gradually increasing.
- When ADX is between 50-75, the market is experiencing a strong trend.
- When ADX is in the range of 75-100, the market is witnessing a super strong trend, however, this rarely happens.
Identify trends with the advanced ADX indicator
When +DI crosses -DI and ADX crosses 25, it is the ideal time to buy and a sharp rise in ADX points to a stronger trend. If -DI crosses +DI and ADX crosses 25, it is a sign of a downtrend, with a strong ADX indicating a clearer downtrend. The larger the distance between +DI and -DI, the stronger the signal for a trend reversal.
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Conclude
Above is specific information to help you understand the concept of what the ADX indicator is and how to use it in forex to achieve profits. Hopefully, through this article, investors have gathered information about the ADX index, its meaning and calculation, especially how to use it effectively. At the same time, it is necessary to coordinate other indicators and technical tools to optimize profits from forex trading. Don’t forget to visit Forex Trading for more useful information about the foreign exchange market!
Frequently asked questions
How ADX work?
The ADX indicator is calculated based on price movements over a certain period, usually 14 or 21 sessions. In which: The higher the ADX index value, the stronger the trend. The +DI line measures the strength of an uptrend. The -DI line measures the strength of the downtrend.
How to use ADX?
ADX can help confirm trends identified by trend lines. Or it can be combined with momentum indicators such as RSI, and Stochastic to identify potential reversal points. Or used to filter price models, indicating models with a higher likelihood of success.
Risks when using ADX?
ADX can give false signals, especially in highly volatile markets. ADX can be misinterpreted if not used in conjunction with other technical tools. Default ADX settings may not be suitable for all markets and trading timeframes.
