How to Trade Forex Using Average Directional Index (ADX)

Average Directional Index (ADX) is a Forex analysis tool used to establish the strength of current trend in the Forex market.

This index is an example of an oscillator, so when you are looking for the ADX in your trading platform, you should go to the oscillators’ tab to find this tool.

How to Read and Use ADX in Forex Trading

The ADX is measured on a scale of 0-100. A reading of below 20 shows a weak trend of the currency pair; while readings above 50 indicates a strong trend.

A strong trend leads to high ADX.

Weak trends are associated with low ADX – when prices are going sideways or trending in a horizontal manner (range).

ADX readings above 50 show that the market prices are trending in one direction – the momentum is high towards one direction.

This index does not show whether the trend is bullish or bearish, but it shows the strength of the prevailing trend.

In this regard, the ADX is useful when determining whether the market is ranging or beginning a new trend.

When using ADX in Forex trading analysis, you should look at 20 and 40 points.

ADX Forex Trading

In the figure above, ADX was below 20 for a long period until December before going up above 50. This shows that the price was ranging for a while before a new downtrend showing again in early January.

A savvy trader would wait for a breakout as a confirmation of a downtrend before selling the pair.

You should combine ADX with another tool that indicates whether the price is going up or down. For example, when ADX is high, and the Stochastic is showing an uptrend, you should buy the pair.

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