What is the ADX Indicator? How to use the Average Directional Movement Index Guide

The Negative Directional Movement (-DM), is equal to the current low minus the previous low, if it’s bigger than +DM and greater than zero. The formula for calculating ADX may be hard to grasp at first, and is something you could skip if you only want to know how to use the indicator. The next time you think a trend is changing and you need to decide whether to stick to this “friend” or cut ties, consider trying the ADX to confirm the trend’s strength. One way to trade using ADX is to wait for breakouts first before deciding to go long or short. When you’re using the ADX indicator, keep an eye on the 20 and 40 as key levels. If the -DI is above the +DI, when the ADX moves above 25 that could trigger a short trade.

Our first recommendation is to only trade long positions when the DI+ is over the DI-, or in other words, when the histogram is positive. As you can see, the last step will also apply a smothering in the DX formula, obtaining thus the ADX indicator. In other words, if the histogram is green, the trend is bullish, while if the histogram is red, we have a bearish trend. Trying to understand how the ADX indicator is composed could be quite difficult, but we will explain everything we need to know in this article. Even though the differences between this and the previous image aren’t that significant, they are big enough.

ADX indicator MT4

ADX will meander sideways under 25 until the balance of supply and demand changes again. Knowing when trend momentum is increasing gives the trader confidence to let profits run instead of exiting before the trend has ended. However, a series of lower ADX peaks is a warning to watch price and manage risk.

Within a short period of time, it gives you a chance to know the general market trend which is very crucial in intraday buying and selling. In the chart below you can simply https://traderoom.info/defining-economic-calendars/ observe that as soon as -DI broke the previous high of +DI there was a strong downtrend in the price. You can use this strategy to exit your position at the right time.

What is Supertrend Indicator? – A Quite Handy Tool To Spot Trends

We are just a few more steps away from the main point of this story, ie the ADX indicator. In that respect, we find the actual range of the price action between the days. (b) In columns B, C, and D put the market’s high, low and closing prices respectively. As you can see in the chart below, the stock rallied once there was a +DI breakout. And do not forget that these signals are valid only if ADX is greater than 20.

And while it’s in the market, I will continue the explanation. The crossing of the +DI and -DI lines means that the market is in equilibrium (the buying and selling volumes are equal). If the lines diverge after crossing, it means that the balance of buyers and sellers is getting disturbed. If there are more buy orders, the price starts to rise, and +DI moves upward. You can download the Excel calculation template for the ADX Indicator here. All you need to do is enter the price data in columns B, C, and D.

How to Trade Using ADX

Wilder’s Parabolic SAR could have been used to set a trailing stop-loss. Notice that there was no sell signal between the March and July buy signals. This is because ADX was not above 20 when -DI crossed above +DI in late April.

• ADX/DMI enthusiasts can click here to download this spreadsheet and see the gory details.
• Short-term traders could enter trades when the two lines move apart to take advantage of increasing volatility.
• However, trades can be made on reversals at support (long) and resistance (short).
• The first technique is used to smooth each period’s +DM1, -DM1 and TR1 values over 14 periods.

As the name suggests, the Positive Directional Indicator is used to help us gauge the uptrend of the market. Of course, we pair it with the Negative Directional indicator to derive real meaning from the indicators. It is generally agreed that if the ADX is above 25, it is a sign of a strong trend.

ADX Reversal Pattern  – Change in Dominance

ADX is plotted as a single line with values ranging from a low of zero to a high of 100. ADX is non-directional; it registers trend strength whether price is trending up or down. The indicator is usually plotted in the same window as the two directional movement indicator (DMI) lines, from which ADX is derived (shown below). It is a tool that is both a trend indicator and an oscillator, which can be used on different markets, for example in forex trading or trading CFDs.

ADX/DMI enthusiasts can click here to download this spreadsheet and see the gory details. The chart below shows an example of ADX with +DI and -DI using the Nasdaq 100 ETF (QQQQ). Smoothed versions of +DM and -DM are divided by a smoothed version of the Average True Range to reflect the true magnitude of the move. When price makes a higher high and ADX makes a lower high, there is negative divergence, or non-confirmation.

It is ideal for helping you to find extremely active intraday moves. When you want to use it for intraday trading, the best approach is to use the Bollinger bands. According to our rules, we should not trade when the orange line appears, but we should be vigilant too, because the ADX indicator is under both DI lines. As you can see, a strong movement at the end of the marked is present in the prices. Again, if the ADX falls under both DI lines, this means that we are entering a dormant market.

Therefore, figure out the optimal set of indicators and their combinations using demo retail investor accounts. Comment below if you need templates for these indicators or if you don’t know how to download ADX in a modified version. In detail, with screenshots and practical examples, work with screeners is discussed in the review of another indicator – the relative strength index RSI.