Trend Indicator: ADX
Average Directional Index or better known as ADX is a lagging trend indicator. This indicator is designed by J Welles Wilder and indicates the strength of a trend, or to indicate price movements are in an uptrend or a strong downtrend. Or move sideways.
ADX is part of the DMI indicator system, first introduced by J. Wells Wilder, in his New Concepts in Technical Trading Systems 1978. The DMI indicator consists of three lines: the DI + line, the DI-line and the ADX line but ADX can also be used individually at any timeframe to help you determine a turning point in the market. ADX is an oscillator that fluctuates between 0 and 100, with values above 40 generally showing strong trends and values below 20 indicating weak trends or ranging or sideways.
However, ADX does not indicate whether the trend is bullish or bearish. It only shows the strength of the current trend. Thus a value above 40 could indicate a strong uptrend as well as a strong downtrend. A very high value and a starting turn indicates that the trend is likely to end or start to weaken.
ADX also does not provide signals (entry) or exit (exit). However, it gives you some perspective that the pair is in a trend. A low score (below 20) gives you a perspective that the pair is in a ranging or early trend condition.
Generally, a pair that is in a strong uptrend should be bought and held up to one or more momentum indicators, such as the RSI or CCI showing signs of weakness. Pairs that are in ranging conditions, ie sideways moving in tight range should be analyzed using oscilator indicator, such as stochastic oscillator for entry and exit levels.
When ADX is between 0 and 20, this indicates that the pair is in a ranging state and you need an oscilator indicator to determine entry and exit levels.
When ADX moves above 20, this indicates the beginning of the trend, although it can be an uptrend or downtrend. So remember to make sure it’s an ascending or descending trend before you open positions.
When ADX moves above 30, this indicates the start of a strong trend! This is the best time to enter the market (open position).
Once the ADX moves above 50, it becomes more likely that the trend is about to end and the ranging condition can reappear.