And vice versa, a “sell” signal occurs when -DMI crosses above +DMI (ADX must be above 25). A “Buy” signal occurs when +DMI crosses https://traderoom.info/ic-markets-forex-broker/ above -DMI (ADX must be above 25). The buy signal remains in force as long as this low holds, even if +DMI crosses below – DMI.

The ADX helps investors determine trend strength, while -DI and +DI help determine trend direction. The trend can be either up or down, and this is shown by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+DI). These are used to help assess whether a trade should be taken long or short, or if a trade should be taken at all. Although some traders believe the ADX is more effective when used with +DMI and –DMI lines, others claim this combination is ineffective. First, it’s not easy to distinguish between the lines, so traders may be confused by various signals.

Using ADX with SharpCharts

Remember that the ADX itself does not indicate the direction of the trend, only the strength of the trend. The Average Directional Index is calculated by measuring the range expansion over a set period. The calculation example below is based on a 14-period indicator setting, as recommended by Wilder. Directional movement is negative (minus) when the prior low minus the current low is greater than the current high minus the prior high.

With our ADX indicator settings, you’ll have more accurate signals and it will help you get in a trade earlier. The indicator can also be used as a trend or trade confirmation tool. If the +DI is well above -DI, the trend has strength on the upside, and this would help confirm current long trades or new long trade signals based on other entry methods. Conversely, if -DI is well above +DI, this confirms the strong downtrend or short positions.

What Is an Average Directional Index?

If there’s a series of higher ADX peaks, trend momentum is increasing. This will let a trader know that he/she may keep the trend trades open letting the profit run. A series of lower ADX peaks means trend momentum is decreasing. Be aware that despite the decreasing momentum the trend may still continue. Still, in this case, a trader would have to be more attentive and selective about the new entry signals.

• The Average Directional Index (ADX) indicator is used in technical analysis to measure the strength of a prevailing trend.
• Still, a trader must be more attentive and selective about the new entry signals in this case.
• There were two non-trending periods as the stock formed a bottom in February and August.
• This does not mean his indicators cannot be used with stocks, however.
• Often, traders choose to plot the +DI and -DI in the same window as the ADX, which manifests as two additional lines, as shown below.

If the index moves horizontally below level 20, the market is flat. If the index exits the 0-20% zone moving toward 100%, the rate of price change increases, i.e., the trend increases. The index value of 50-60% indicates the imminent end of the trend. The larger the divergence, the higher the ADX and the stronger the trend. To have a clearer understanding of how ADX indicator works and avoid losing money rapidly, practice trading with this momentum indicator in your retail investor account. The two indicators are similar in that they both have lines representing positive and negative movement, which helps to identify trend direction.

Classic signals from the ADX

If the order volume on one side rises sharply, the price starts moving upward or downward, and the indicator single line moves towards 100%. In this guide, we will examine the ADX indicator in great detail and see how to calculate it, work with it, and find signals. Also, this article will analyze practical examples of opening trades with screenshots and ADX trading strategies.

Breakouts happen when there is sudden momentum of an asset’s price, which is normally due to increased supply and demand. The ADX indicator is a common solution for professional investors, analysts, and individual traders alike. Keep reading to learn how this trend strength indicator works as well as how to apply it to your own investments. We are waiting for the dotted +DI and -DI lines to start diverging and when the index line begins to exit the 0-20% zone at the same time. We open a trade in the trend’s direction 2-3 candles after the ADX crossed the 20th level.

Recognizing ADX Trends and Gauging Their Strength

There were two non-trending periods as the stock formed a bottom in February and August. A strong trend emerged after the August bottom as ADX moved above 20 and remained above 20. In general, the bulls have the edge when +DI is greater than -DI, while the bears have the edge when -DI is greater.

There is a Plus Directional Movement (+DM) if the part of the range is above the previous bar, and a Minus Directional Movement (-DM) if the part of the range is below the previous bar. This article represents the opinion of the Companies operating under the FXOpen brand only. You can decide on the effectiveness of the ADX indicator together with  +DMI and –DMI lines on the TickTrader platform for free. The red arrow on the chart indicates the point of opening the trade. The situation indicated in point 1 was explained at the beginning of this section. The index left the 0-20 zone after the +DI and -DI crossover, the red dotted -DI went up, indicating a downtrend.

Benefits of Using the ADX

This blog post is for traders who want to get knowledge on ADX from its basics. The Oscillator Extremes indicator plots the normalized positioning of the selected oscillator versus the Bollinger Bands’ upper and lower boundaries. Currently, this indicator has four different oscillators to choose from; RSI, CMO, CCI, and ROC. When the oscillator pushes towards one extreme, it will bring the value of the prevailing line closer to zero. Last but not least the best ADX strategy also needs a place where we need to take profits, which brings us to the last step of this unique strategy. Finally, your chart setup should have at the bottom both the ADX and RSI indicator.