The Average Directional Index (ADX) Indicator
Oct 30, 2023 |
THE AVERAGE DIRECTIONAL INDEX (ADX) INDICATOR
When trading, you should assess a trend's strength, regardless of its direction. The Average Directional Index (ADX), a well-known technical indicator, serves this purpose. ADX, an oscillator, ranges from 0 to 100. Readings below 20 depict a weak trend, while readings above 50 signify a strong one.
Low ADX values indicate sideways or range-bound price movements. When ADX surpasses 50, it indicates increased price momentum in a single direction. Unlike the Stochastic, ADX doesn't determine bullish or bearish trends; it exclusively gauges the current trend's strength. Consequently, ADX is mainly used to discern between ranging markets and emerging trends.
BUY SETUP
● Wait for the ADX value to surpass the 20 mark for the buy setup.
● An ADX value of over 20 indicates the start of a strong trend.
● When the ADX is below 20, the market is consolidating.
● Enter the trade when the ADX and price break out from consolidation to the upside.
● Place your stop loss slightly below the previous low.
● Exit the trade when the ADX value begins to drop, indicating a weakening trend.
SELL SETUP
● For the sell setup, wait for the ADX value to surpass the 20 mark.
● An ADX value of over 20 indicates the start of a strong trend.
● When the ADX is below 20, the market is consolidating.
● Enter the trade when the ADX and price break out from the consolidation to the downside.
● Place your stop loss slightly above the previous high.
● Exit the trade when the ADX value begins to drop, indicating a weakening trend.
CONCLUSION
The ADX is a great tool that shows a trend's strength. Values over 50 indicate a strong trend, while those below 50 indicate a weakening trend.
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