How to Learn FOREX ADX
The ADX is also know as the average direction indicator. It was created by a well-known stock market technician named Welles Wilder. It's purpose is to determine the strength of the trend in the market. Although it was originally designed for stocks you can also use it on the forex and commodities markets as well.
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Instructions
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Add the ADX indicator to your software charting system. If you don't have one MetaTrader 4 is a commonly used program that you can download for free from several brokers (see Resources). Add the ADX by going to "Insert" then "Indicators" and then click on "Average Directional Movement Index." Leave the settings on default.
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Use the ADX line to determine trend strength. The ADX or average directional indicator is the solid line on the chart. There will also be two other broken lines called the positive direction indicator or "+DI" and the negative direction indicator or "-DI." When the ADX line is below 20 this indicates that there is a weak trend in place and the market could reverse at any time. When the ADX is above 40 it shows that the market is in a strong trend. Note that this can mean a strong upward trend or a strong downward trend as well. When the ADX crosses above 20 it shows that the trend strength is increasing. If it crosses below 40 it shows that the trend strength is decreasing and the market may become range bound.
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Usually the positive and negative direction indicator for buy and sell signals. When the -DI crosses the +DI from the top this gives a sell signal. A buy signal occurs, when the +DI crosses line crosses the -DI from below.
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Make sure to use the ADX in conjunction with at least two other indicators such as the MACD, or the RSI for trade entries.
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References
- Photo Credit information and money image by Vladimir Melnik from Fotolia.com
