The ADX indicator, also known as the average directional index, is one of the more common indicators and will be found in most charting software. It is very popular with stock market traders and investors because it is really good at highlighting trends. However it is also used by a lot of forex traders as well, and can be very beneficial.
The primary function of the ADX indicator is to highlight trends in the markets, and what this indicator also does well is to indicate the overall strength of these trends. In simple terms if the ADX indicator is below 20, then there is no clear trend present and you shouldn't be thinking about entering a position just yet. This will often be fairly obvious anyway because the price will usually be confined to a tight trading range when this happens.
However if it climbs above the 20 level (or 25 depending on your overall preference), this indicates a strengthening of the trend and potentially the start of a new trend. The higher the value the stronger the trend.
You might assume that the best time to trade is when the trend is at it's strongest, which is often when the ADX is in the 40-60 region, but this is not necessarily the case because the ADX will often peak at these levels and turn downwards. So this tells you that the trend is weakening and possibly coming to an end.
For me I like to use the ADX indicator when I see new breakouts at the beginning of the trading session for one of the major currency pairs. I like to see the price making new highs or lows whilst the ADX is moving upwards at the same time, preferably from a period of consolidation where the ADX was previously around the 20-25 level. This is often a very good high probability trading opportunity. If, however, the ADX is already very high or moving downwards at this point, then I will exercise a lot more caution.
Anyway the point I want to make is that on the whole the ADX technical indicator is really useful and certainly worth adding to your armoury. It won't tell you the direction of the trend (unless you employ the optional DI indicators). You have to determine this for yourself. However it will tell you the strength of any trends, and alert you to trendless markets as well as the start and finish of new trends.
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