Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

tmbaru

Trading Using Average Directional Index (ADX)

Recommended Posts

Trading in the Forex market in the direction of a strong trend lowers risk and increases profit potential. The ADX (Average Directional Index) is used in the market to establish when currency price is trending strongly. Average Directional Index is in essence the ultimate trend indicator. In this article, we will take time to examine the value of Average Directional Index as a trend strength indicator.

 

ADX calculations are usually based on the moving average of price range expansion within a stipulated time frame. ADX is plotted as a single line with various values ranging from 0 to 100 in the same window as two DMI (Directional Movement Indicator). Average Directional Index is non-directional and as such it registers trend strength by rising uptrends and downtrends.

 

Quantifying Trend Strength

 

Average Directional Index values enable traders to identify most profitable and strongest trends to trade in the currency market. ADX values are also critical for differentiating trending and non-trending conditions. A majority of Forex traders will use ADX value above 25 to indicate that the trend’s strength is good enough to allow for trend trading strategies. On the hindsight, when ADX values are below 25, many traders will avoid trend trading strategies.

Low Average directional Index is usually a sign of distribution or accumulation. When ADX values are below 25, price enters range conditions as well as price patterns becomes easier to identify. Price then moves up and down between support and resistance to find buying and selling interest respectively. Thus, from low ADX conditions the price will eventually break out into a trend.

 

The direction of the ADX line is critical fro reading trend strength. When the ADX line is rising then the trend strength is increasing as well as price of the currencies moves in the direction of the trend. On the flip side, when the ADX line is falling then the trend strength is decreasing and the currency price enters a period of consolidation or retracement. It is worth noting that there is always a common misperception that a falling ADX lines implies the trend is reversing. The truth of the matter is that a falling ADX line only shows that the trend strength is weakening but does not imply that the trend is reversing unless in special cases when there has been a price climax.

 

Trend Momentum

 

The series of ADX peaks is a visual representation of overall trend momentum. Average Directional Index clearly shows when the trend is losing or gaining momentum in the market. Momentum in its basic sense is the velocity of price. A series of higher ADX peaks shows that the trend momentum is increasing. On the other hand, a series of lower ADX peaks show that the trend momentum is decreasing. Knowing when the trend momentum is skyrocketing gives the trader confidence to let profits run. A series of lower ADX peaks is a warning to the traders to watch price and manage risk. The best trading decisions in the Forex market are made on objective signals and not from emotions.

When currency price makes a higher high and Average Directional Index makes a lower high then there is negative divergence. It is worth mentioning that divergence is not a signal for a reversal but a warning that the trend momentum is changing. Any time the trend changes character in the market then it is time to assess and manage risk.

 

Strategic Use of Average Directional Index

 

Currency price is the most important signal on a chart. Therefore it is advisable that you read price first then read ADX in the context of price. When indicators are used, they should add something that price alone cannot tell. Breakouts from a price range usually occur when there is a disagreement between buyers and sellers on price. ADX tells traders when breakouts are valid by showing when Average Directional Index is strong enough for price to trend in the market after the breakout.

Best profits come from avoiding range conditions and trading the strongest trends. ADX helps traders to identify trend conditions and also enable them to find the strongest trends to trade in.

“The trend may be your friend, but it sure helps to know who your friends are.”

ADX.gif.11bf2e267c110750e203fa6ec245e765.gif

5aa711dab2426_ADX2.gif.02722a782477c8a1b6921744243798f5.gif

Share this post


Link to post
Share on other sites

The “Average Directional Movement Index”, or “ADX”, indicator is a member of the “Trend” family of technical indicators.

Traders use the index to determine if a trend will extend or gradually lose its strength, valuable information when setting entry and exit levels in the forex market.

Share this post


Link to post
Share on other sites
I used ADX in the past and I just couldn't figure out a way to make money from it even in combination with DMI+ and DMI-. Maybe it was just me...

 

I used to use it on stocks trading alongside MACD and Stochastics, it wasnt that bad but i have to say my work used to be done without it using only MACD and stochastics ...

Overall after my experience over the different market asset classes, i'd say fundamentals are always more important than technicals...

Share this post


Link to post
Share on other sites
I used to use it on stocks trading alongside MACD and Stochastics, it wasnt that bad but i have to say my work used to be done without it using only MACD and stochastics ...

Overall after my experience over the different market asset classes, i'd say fundamentals are always more important than technicals...

 

I agree about the importance of fundamentals but it is hard for someone to know the true fundamentals.

Share this post


Link to post
Share on other sites

Technical Analysis gives you the overall picture, is less time consuming, keeps your emotions out of trading and lets you trade the reality - without having to impose an opinion.

 

You trade the truth and that is the market price as you see it NOT what you think it should be.

 

On the flip side, fundamental analysis are usually influenced by the emotions of greed and fear. We all have the same facts to look at but we all make subjective judgements on what the facts mean.

Share this post


Link to post
Share on other sites
I used to use it on stocks trading alongside MACD and Stochastics, it wasnt that bad but i have to say my work used to be done without it using only MACD and stochastics ...

Overall after my experience over the different market asset classes, i'd say fundamentals are always more important than technicals...

 

I agree but not for the next hour or even day. And deciphering importance and impact is not an easy job.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • HLF Herbalife stock, watch for a bull flag breakout above 9.02 at https://stockconsultant.com/?HLF
    • Date: 1st April 2025.   Will Gold’s Rally Hold Strong as New Trade Tariffs Take Effect Tomorrow?   Gold continues to increase in value for a sixth consecutive day and is trading more than 17% higher in 2025. Amid fear of higher inflation, a recession and the tariffs war escalating investors continue to invest into Gold pushing demand higher. The trade policy from April 2nd onwards continues to be a key factor for the whole market. Can Gold maintain its upward trend? Trade Policy From Tomorrow Onwards Starting as soon as tomorrow, a 25% tariff will be imposed on all passenger cars imported into the United States. While this White House policy is anticipated to negatively affect European industrial performance, it will also lead to higher transportation and maintenance costs for everyday American taxpayers. The negative impact expected on both the EU and US is one of the reasons investors continue to buy Gold. Additionally, last month, President Donald Trump announced reciprocal sanctions against any trade partners that impose import restrictions on US goods. Furthermore, tariffs on products from Canada and the EU could increase even more if they attempt to coordinate a response. Overall, investors continue to worry that new trade barriers will prompt retaliatory measures, particularly from China, the Eurozone, and Japan. Any retaliation is likely to escalate the trade conflict and prompt another reaction from the US. Experts at Goldman Sachs and other investment banks warn that this will lead to rising inflation and unemployment. They also caution that it could effectively halt economic growth in the US.   XAUUSD 1-Hour Chart   The Weakness In The US Dollar Another factor which is allowing the price of XAUUSD to increase in value is the US Dollar which has been unable to maintain any bullish momentum. Despite last week’s Core PCE Price Index rising to its highest level since February 2024, the US Dollar has been unable to see any significant rise in value. Due to the US Dollar and Gold's inverse correlation, the price of Gold is benefiting from the Dollar weakness. Investors worry that new trade barriers will prompt retaliatory measures from China, the Eurozone, and Japan, potentially escalating the conflict. Experts at The Goldman Sachs Group Inc. believe that such actions by the US administration will drive rising inflation and unemployment while effectively halting economic growth in the country. Can Gold Maintain Momentum? When it comes to technical analysis, the price of Gold is not trading at a price where oscillators are indicating the instrument is overbought. The Relative Strength Index currently trades at 68.88, outside of the overbought area, since Gold’s price fell 0.65% during this morning’s session. However, even with this decline, the price still remains 0.40% higher than the day’s open price. In terms of fundamental analysis, there continues to be plenty of factors indicating the price could continue to rise. However, the price movement of the week will also partially depend on the employment data from the US. The US is due to release the JOLTS Job Vacancies for February this afternoon, the ADP Non-Farm Employment Change tomorrow, and the NFP Change and Unemployment Rate on Friday. If all data reads higher than expectations, investors may look to sell to lock in profits at the high price. Key Takeaway Points: Gold’s Rally Continues – Up 17% in 2025 as investors seek safety from inflation, recession fears, and trade tensions. Trade War Impact – New US tariffs and potential retaliation from China, the EU, and Japan drive uncertainty, boosting Gold demand. Weak US Dollar – The Dollar’s struggle supports Gold’s rise due to their inverse correlation. Gold’s Outlook – Uptrend may continue, but US jobs data could trigger profit-taking. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Date: 31st March 2025.   Trump Confirms Tariffs on All Countries, Sending Stocks Lower.   The NASDAQ continues to trade lower due to the US confirming the latest tariffs will be on all countries. In addition to this, bearish volatility also is largely due to the higher inflation data from Friday. The NASDAQ declines to its lowest price since September 11th 2024. Core PCE Price Index - Inflation Increases Again! The PCE Price Index read 2.5% aligning with expert forecasts not triggering any alarm bells. However, the Core PCE Price Index rose from 0.3% to 0.4% MoM and from 2.7% to 2.8% YoY, signalling growing inflationary pressure. This increases the likelihood that the Federal Reserve will maintain elevated interest rates for an extended period. The NASDAQ fell 2.60% due to the higher inflation reading which is known to pressure the stock market due to pressure on consumer demand and a more hawkish Federal Reserve. Boston Fed President Susan Collins recently commented that tariffs could drive up inflation, though the long-term impact remains uncertain. She told journalists that a short-term spike is the most probable outcome but believes the current pause in monetary policy adjustments is appropriate given the prevailing uncertainties. Although, certain investment banks such as JP Morgan actually believe the Federal Reserve will be forced into cutting rates. This is due to expectations that the economy will struggle under the new trade policy. For example, JP Morgan expects the Federal Reserve to delay rate cuts but will quickly cut towards the end of 2025. Market Risk Appetite Takes a Hit! A big factor for the day is the drop in the risk appetite of investors. This can be seen from the VIX which is up almost 6%, Gold which is trading 1.30% higher and the Japanese Yen which is the day’s best performing currency. Most safe haven assets, bar the US Dollar, increase in value. It is also worth noting that all indices are decreasing in value during this morning's Asian session with the Nikkei225 and NASDAQ witnessing the strongest decline. Previously the stock market rose in value as investors heard rumours that tariffs would only be on certain countries. This bullish swing occurred between March 14th and 25th. Over the weekend, President Donald Trump indicated that the upcoming tariffs would apply to all countries, not just those with the largest trade imbalances with the US. NASDAQ - Technical Analysis In terms of technical analysis, the NASDAQ continues to obtain indications that sellers control the price action. The price opens on a bearish price gap measuring 0.30% and trades below all Moving Averages on all timeframes. The NASDAQ also trades below the VWAP and almost 100% of the most influential components (stocks) are declining in value.     The next significant support level is at $18,313, and the resistance level stands at $20,367.95. Key Takeaway Points: NASDAQ falls to its lowest since September 2024 as the US confirms tariffs on all countries, adding to inflation concerns. Core PCE inflation rises to 0.4% MoM and 2.8% YoY, increasing the likelihood of prolonged high interest rates. Investor risk appetite drops as VIX jumps 6%, gold gains 1.3%, and safe-haven assets outperform. NASDAQ shows strong bearish momentum, trading below key technical levels with support at $18,313 and resistance at $20,367.95. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • PM Philip Morris stock, top of range breakout at https://stockconsultant.com/?PM
    • EXC Exelon stock, nice range breakout at https://stockconsultant.com/?EXC
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.