The short name for the Average Directional Index is = ADX, a type of oscillator that measures the strength of market trends.
This indicator has a reading from 0 to 100 that allows traders to understand the market trends. It indicates when its readings go below 20, the current trend is very weak and when the reading goes above 5, it indicates a strong trend.
Unlike the Stochastic Indicator, it will not give you direct bye or sell signals. It will tell you the strength of the current market trend.
This is why Forex traders are able to understand the position of the market through this indicator. For example, is the market now in a ranging position or creating a new trend!
See the charts below. We have tried to show the use of this indicator here –
The chart above is for the EUR/CHF currency pair. As you can see, the price of the ADX Indicator was below 20 readings when Price was moving around.
After a few days, the price comes out of that particular position and ADX continues to create new trends Once, in a while, we see ADX’s value reaching the top of the readings, and the market price has also created a new downtrend with a lot of energy.
Price drops down to about 400 pips. Did you understand anything
Notice this example-
As in the example above, when the readings of the ADX Indicator were below 20, the price was in the range for a long time, ie, rotating in a fixed position. After some time, ADX’s reading rises above 5, and the price of EUR / CHF rises out of the ranking position and creates a strong uptrend. It had an uptrend of about 300 pips.
Don’t say easy!
One of the major problems with this indicator is that it does not indicate when to buy or sell or sell.
It just indicates when you can take the entry.
When the readings of this ADX Indicator are going down, it means that the uptrend or downtrend has started to weaken and this is the most ideal time to make a profit.
How to use ADX Indicator
One way to trade through this indicator is to wait for a breakout first and then you will receive an entry in the buy or sell position.
Whether the current trend will continue! This indicator also acts as an indicator.
Another means of trading is to trade this indicator in conjunction with another indicator and then trade it. That is, to use it with one of the indicators that helps us to buy by and for cell entry.
Also, ADX will also give you instructions on when to close your position.
For example, when you see readings begin to fall below 5, you will realize that market trends have started to weaken gradually so if you have taken any previous entry, you can close the position.
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