Part 2 Technical Analysis – How To Use The ADX Indicator

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How to use ADX/DMS indicator – Technical indicators

Average Directional Index or ADX is an indicator that uses three inputs to analyse the strength and direction of a price trend. It was originally devised by J.Welles Wilder in the year 1978. Wilder features the ADX in his book, New Concepts in Technical Trading Systems. This book also includes details on Average True Range (ATR), the Parabolic SAR system, and RSI. The three inputs are the Average Directional Index (ADX), the Minus Directional Indicator (-DI) and the Plus Directional Indicator (+DI). In this ADX measures the strength of a trend, regardless of direction. The Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) measure the direction of the trend. By default, the ADX is calculated by taking the 14-day moving averages of the +DI and -DI values. Using these three indicators together, we can determine both the direction and strength of the trend. Anyways, We need to focus primarily on the ADX rather than the other two.

Always you have to keep in mind that ADX indicator measures strong or weak trends. This can be either a strong uptrend or a strong downtrend. It does not tell you if the trend is up or down, it just helps you understand the strength current trend.

The Black coloured line in the above picture is the ADX line. The Greenline is Plus Directional Indicator and Redline is Minus Directional Indicator. When the green line crosses above the red line you can see the price is increasing and in vice versa, the price is dropping off.

ADX indicator scale

An ADX line is plotted between 0 to 1oo.

ADX Value Trend Strength
0 – 25 Absent or Weak Trend
25 – 50 Strong Trend
50 – 75 Very Strong Trend
75 – 100 Extremely Strong Trend

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just moving around sideways. Avoid to trade stock at this moment because it will take either uptrend or downtrend at any moment.

While ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.

When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend. These are the stocks that you should trade with.

It’s rare to see stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

Wilder suggests that a strong trend is present when ADX is above 25 and no trend is present when below 20. When the ADX turns down from high values, then the trend may be ending. You may want to do additional research to determine if closing open positions are appropriate for you. If the ADX is declining, it could be an indication that the market is becoming less directional, and the current trend is weakening. You may want to avoid trading trend systems as the trend changes. If after staying low for a lengthy time, the ADX rises by 4 or 5 units, (for example, from 15 to 20), it may be giving a signal to trade the current trend. If the ADX is rising then the market is showing a strengthening trend. The value of the ADX is proportional to the slope of the trend. The slope of the ADX line is proportional to the acceleration of the price movement (changing trend slope). If the trend is a constant slope then the ADX value tends to flatten out.

Disclaimer: All views expressed in this site are for reference only. Readers must consult their own investment adviser before making any investment/trading decision. We hold no financial liability to any user on account of the use of information provided on this website.

How to Use the ADX Indicator to Improve Your Trading?

The ADX or the Average Directional Index indicator is a handy tool that can help traders in a number of ways. For the most part, those who follow a trend trading strategy will discover that the ADX can be a useful addition.

While traders often end up using two or more indicators that basically gives the same information making them redundant, the ADX indicator in fact compliments any other trend based indicators.

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In this article, we will look at how you can use the ADX indicator in your trading and more importantly how you can improve your trend trading strategies.

What is the ADX Indicator?

The ADX indicator is available for free on the MT4 trading platform. The indicator comprises of three variables. The +DI, -DI and the ADX line itself. Combined, all these three variables give information to the trader, informing when the trend is strong and also shows what the current trend is.

The ADX indicator is shown on the first chart below. Here, we use the standard setting of 14-periods.

ADX Indicator Example

You might notice that the level used for the ADX line is 25. This is quite subjective, and it is up to the trader. The ADX level shows when the trend is strong. Thus, when the ADX line is above 25, it indicates that the underlying trend will most likely continue.

In some cases, traders use the levels of 28 or even set a range of 25 – 28 as well. The above chart shows the ADX indicator for the EURUSD daily chart. Of course, the indicator can be applied to any time frame as well.

How to use the ADX indicator for trend trading?

There are two ways one can use the ADX indicator.

  1. Determine trends
  2. Determine the strength of the trends

Each of these two methods is outlined in more detail below.

To determine trends with the Average Directional Index, you can simply hide the ADX line. In this instance, the ADX indicator will only show you the +DI and -DI variables.

ADX Trend determination

In the above example, you can see how the +DI and -DI (along with price action) can signal the trends. The first instance shows the bearish trend, depicted by the -DI rising above the falling +DI. This also coincides with a breakdown of prices below the most recent higher low.

Although price action consolidates at this level, we can see the price falling a few pips below the level identified.

In the next example, you can see that major pivot high that was formed. After the pullback, price action broke past this level and surged higher. This bullish short-term uptrend was depicted by the +DI rising while the -DI was falling.

You can use a number of other indicators such as Bollinger bands or moving averages to act as an additional confirmation of the trend.

The trend determination using the ADX can help you to understand which way the markets are going. Combining with price action, you can expect to see sideways markets as well and stay away when the markets are flat.

You can also use the ADX to determine the strength of trends. In this example, you will have to use a price overlay indicator on the main chart. In the sub-chart, only the ADX line is used. This can be done by hiding the +DI and -DI levels in the indicator.

ADX Trend Strength

In determining the trend strength, traders can use moving averages on the main chart to understand the trend and use the ADX line to identify when the trend is strong. Because not all trends are powerful, the ADX line is a great way to determine when the trend strength is rising.

This typically coincides with a pullback in price to the moving average before price resumes its trend.

While the above two ways of using the ADX indicator might seem simple, they are in fact very powerful. The ADX indicator can help traders to stay out of the flat market which is where most of the money is lost.

By picking the price when the trend is the strongest, the ADX indicator can compliment any existing trend based trading strategy.

ADX indicator? – page 2

I got the TS code, I think. Can someone convert it?

If Plot1 = Ref and Plot1 = Trend Then

If MRO(Plot1 -1 AND Plot1 Plot1[1], 3, 1)[1] > -1 AND Plot1 > Plot1[1] Then

Alert(“ADX has just turned up”);

Thanks licho but it should stay RED above the level adjusted. appreciate the effort:)

OK, try the attached file. The ADX keeps being RED all the time its value crosses the set level independing on the movment direction (THERE IS NO GREEN LINE). Please mind that as long as ADX line is above the set level there can be both falling or rising price movment. The direction you can determine watching +/-DI lines. Take care and good luck.

You have done it mate. Thanks a million:)

You curves don’t look very juicy. And the +/-Di lines are not very useful at all. So I just modified your code. Here you go.

ADX indicator help

I’m using the stock adx indicator that comes with mt4. But was wondering if it was possible to change the adx numbers in top left corner to a better visual and easier to use as a reference. Don’t need any decimal places after the number, just bolder and easier to glance at. and if the size could be adjustable that would be great. I have added a doctored picture of what i’m talking about

The adxturn indicator when shows a red bar always indicates a big move as shown in the picture. Is there a mq4 equivalent of this indicator. At present it is one of bernie mitchells fear and greed indicator for ninja trader.

Any suggestions would be greatly appreciated.

ADX histogram is on this page https://www.mql5.com/en/forum/172923 (may be different from what you are looking for).

Hull Style ADX v3 indicator with MA of ADX and individual period settings for ADX and PlusDi/MinusDi https://www.mql5.com/en/forum/175544

ADX indicator help

I’m using a smoothed adx indicator and I also have a adx histogram indicator(But it’s signal isn’t smoothed) Can anybody take the adx histogram(mj_adxfilter_vbob) and match it’s signals to the smoothed adx. Add the smoothing to it. Many Thanks if anybody can help me out

Is there a version of the ADX indicator anywhere in color ? Eg: the ADX is green when rising and red when falling ? Thanks !

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