Forex Indicators_6. Forex Average Directional Index ADX

Lesson 6: Forex Average Directional Index ADX

The average directional index - or ADX - is an indicator of directional movement
and is used to measure the strength and direction of a trend. It consists of four main
components; the ADX line, the +Di Line, the –Di Line, and the 20 level.
First of all, ADX is great to determine if the pair is in a range or in a trend. ADX
line-values below the 20 level suggest that the price is in a range. When the ADX
rises above the 20 level, it shows that the trend may be starting.

So when the ADX is below 20, you can trade range opportunities. You can use
indicators like stochastic to look for overbought and oversold readings to decide your
entries and exits.
If the ADX rises above the 20 level, it indicates an end to the consolidation period
and there are high chances of a breakout. You will then have to follow other
strategies, such as +Di and –Di lines for knowing the direction of the trend.

So, if a +Di line is on the top, it suggests that the price is trending upward and if the
–Di line is on the top, it indicates that the price is trending downwards. Another
important thing to consider about the + and – Di lines, is the height of the peaks after
crossovers.
You can see here that the +Di line has been on top for some time which suggests
an up-trend. When the –Di line crossed over, we measured the height of its peak. If
a peak is lower than the +Di’s last peak, it shows that the recent price action has
been just a retracement and we should still be looking for buying opportunities.

However, if the –Di peak after the crossover is higher than the +Di’s latest peak, it
signals that the trend may be changing and we should start looking at either closing
our long positions or looking at selling opportunities.