TECHNICAL INDICATORS- WHAT IS THE ADX? BY LANE CLARK, BETA 2 LTD.
What is the ADX and how should a trader use it?
Firstly, the ADX stands for the Average Directional Index. But apart from knowing what it stands for, how can a trader take advantage of it?
I’m hopeful the following article will help to answer this.
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The ADX indicator measures the strength of a trend and can be very useful to determine if the trend is strong or whether it is weak. What I mean by this is it will tell you if the market is ranging or trending. High readings on the indicator suggest it is a strong trend, whilst low readings suggest a weak trend and implies the markets are ranging.
It doesn’t tell you in what direction the trend is moving, it just tells you how strong (or not) the trend is.
If the ADX is between 0 and 25, then the chances are that the FX pair/commodity/stock is likely to be chopping around and trading sideways. If you’re looking to follow a trend- avoid this. If you are range trading though, the world is your oyster with these readings.
An above 30 reading is what trend followers should be looking for. This suggests there is a strong trend, and these sorts of trades are the ones you should aim to be involved in.
You won’t find many trends trading at 50 on the ADX indicator but if you do, be cautious about trading with the trend in this instance as the momentum may fade away.
Personally I find the ADX to be more useful on daily charts, and if the ADX is 30 plus- I look to trade with the trend, or 20 and under- then I’ll look to range trade. Many people use 25 and under to range trade but I see the levels of 20 and 30 to be the neutral zone.
A few other points of thought budding traders should keep in mind is that if the ADX is above 30 but starts to point down a little- this is still a momentum play. If it is under 30, then maybe not, but above 30- trade with that trend.
Also, have trading systems that you utilise when the ADX is above 30, and more than likely a different trading system when the ADX is below 20. Oscillators work great when the markets are ranging.
That my friends- are a few tips on getting the best from your ADX.
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