ADX (Average Directional Index) by FxPremiere Forex Signals Services on ADX (Average Directional Index).
How many times have you entered into a trend only to find out that it has already run its course and you were too late? Many of the Forex trading strategies that we use help us predict which way the market is trending and whether to expect a bearish or bullish trend, but give little or no indication as to the strength of the trend. Sometimes these forex trading strategies will lead us to enter a trade and that trade will turn out to yield very little income, even though it went in the direction that we anticipated.
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ADX, or Average Directional Index, is a tool that is designed to help us anticipate the strength of a trend to avoid these kinds of situations. In combination with other Forex trading strategies the ADX can allow us to fully understand the trend and thus only enter trades that will yield big profits. ADX trading strategy is not a standalone Forex trading strategy as it only gives an indication as to the strength of the trend. It does not give any indication as to the direction of the trend and for that reason, it must be used along with other Forex trading strategies. US INDEX
Understanding the Average Directional Index is very easy. It ranges on a scale from 0-100, 100 indicating a very strong trend and 0 indicating a non-existent trend. Whenever there is a strong trend, the ADX will be above 50. Weak trends are indicated by values under 20 on the ADX scale. US DOLLAR INDEX
This example clearly shows how we can use the Average Directional Index to analyze the trend:
As you can see, in the first part of the chart there is a very strong bearish trend and the ADX (shown on the bottom) is very high. Once the trend ends, and the market begins a sideways stage, the ADX drops below 20. In this case, using the ADX could have helped us exit the trade when it had reached the end of the trend and not waste our time and resources on currency pairs that are not going anywhere.
Combining the ADX indicator with your other Forex trading strategies can give you just the edge you need to increase your profits. Forex Trading Strategies