How to Use ADX (Average Directional Index)

When trading, it is useful to assess the strength of the trend regardless of the direction.

When determining trend strength, the Average Directional Index (ADX) is a commonly used technical indicator.

Another type of oscillator is the Average Directional Index, or ADX.

ADX ranges from 0 to 100, with values below 20 indicating a weak trend and readings above 50 indicating a strong trend.

The ADX formula is technical, but in short, the higher the ADX, the stronger the trend.

When ADX is low, it indicates that the price is usually moving horizontally or in a range.

When ADX rises above 50, it implies that price momentum has shifted in one direction.

Unlike the Stochastic, ADX does not indicate whether the trend is bullish or bearish. It only assesses the strength of the current trend.

As a result, ADX is usually used to determine whether a market is in a range or starting a new trend.

ADX is a “non-directional” indicator. It compares the high and low of the bar and does not take into account the bar’s close.

The bigger the reading, regardless of whether it is an uptrend or a downtrend, the stronger the trend.

How to Use ADX (Average Directional Index).

When using the ADX indicator, pay close attention to the 20 and 40 levels as critical levels.

Here is a quick reference guide for interpreting ADX numbers.

ADX Value	Indication
Rising	Strengthening trend
Falling	Weakening trend
Below 20	Weak trend
Between 20 and 40	Strong trend
Above 40	Extreme trend

Take a look at this cool chart we found:

ADX remained below 20 in this first case from late September to early December.

The chart shows that EUR/CHF has been stuck in a range all this time.

However, starting in January, ADX started to climb above 50, suggesting that a major trend may be in the offing. And look at it! EUR/CHF dropped below the bottom of the range and entered a sharp decline. That’s roughly 400 pips in the bag.

Now, let’s look at the next example:

ADX, like in our first example, stays below 20 for a long time. EUR/CHF also fluctuated at that time.

ADX immediately surpassed 50, and EUR/CHF broke the top of its range.

Tada!

A significant uptrend occurred. 300 pips, signed, sealed and shipped!

Looks pretty simple, right?

If there’s one downside to using ADX, it’s not suggesting you buy or sell.

What it tells you is whether or not you should participate in the ongoing trend.

If ADX falls below 50 again, it could indicate that the uptrend or downtrend is weakening and now is a good opportunity to lock in profits.

How to Trade Using ADX

One strategy for trading ADX is to wait for a breakout before determining whether to go long or short. ADX can be used to confirm whether the pair will continue the current trend or not.

Another method is to combine ADX with other indicators that determine whether the pair is trending up or down.

ADX can also be used to indicate whether a deal should close early.

For example, when ADX falls below 50, it indicates that the current trend is losing speed. After that, the pair may move sideways, so you need to lock in those pips before that happens.

“Trend is your friend,” he said.

Until you get stabbed in the back.

Oh no.

“Until the trend reverses,” I mean.”

Consider using ADX to confirm the strength of a trend the next time you suspect it is changing and you need to determine whether to continue with this “friend” or cut ties.