For most traders, the average directional movement index or commonly abbreviated as ADX is very important to know whether a market is trending or sideways. How accurately does this indicator measure the strength of a trend in forex trading? Before knowing about the indicator itself, you can start by downloading the application of GIC through the Play Store or App Store.

What is the average directional movement index indicator?

The average directional movement index indicator is an indicator used to see the direction and strength of a trend. This indicator, known as ADX, shows when a trend starts, how strong the trend is, and until when the trend starts to weaken. ADX is commonly used to identify prices when the market is in a ranging (sideways) condition or when the market begins to form a new trend.

So, the ADX indicator developed by J Welles Wilder is used to measure the strength of the trend. This indicator consists of one line and refers to the directional movement index which has two indicators, namely +DI and -DI. The ADX has a scale of 0-100, the reading is simple, if the price is below the 20 scale, then the trend is weak and if it is above the 50 scale, then the trend is very strong.

Traders are advised to enter when the trend starts to occur, and exit when the trend weakens. There is no limit to which timeframe is the most suitable, ADX can run well across all trading time periods.  Unlike the stochastic indicator, the ADX does not determine whether the trend is bullish or bearish, but rather measures the strength of a trend. Before discussing how to set indicators, you can register as an IB or invite friends to join GIC and get some additional bonuses.

How do I set up the ADX indicator in MetaTrader? 

For beginner traders, setting up the ADX indicator may seem difficult, but don't worry, you can follow the following method.

1. Open your MetaTrader platform

Choose the chart view of your favorite currency pair. ADX indicators are usually available (built-in) on online trading platforms, including MetaTrader 4 and MetaTrader 5.

2. Setting indikator average directional movement index

Look for the 'Insert' menu, select 'Indicators', then 'Trend', and select 'Average Directional Movement Index'. Use the default parameter period 14. For those of you who don't understand how to set the indicator, you can ask or consult with Trader Assessment so that you can understand more about it                                         

Display and parameters of the average directional movement index indicator

Price is the most important signal when a trader analyzes the chart. Therefore, traders should look at the price movement first, then analyze the direction of the ADX line to find the maximum potential for open positions. The ADX indicator is used to calculate the strength of a trend, regardless of whether it is up or down. The display and parameters of the average directional movement index indicator consist of three components as follows:
  • Positive Directional Indicator (+DI) is a line that measures the strength when the price rises (uptrend) in a certain period. It is usually green. The +DI line will move up if it is in an uptrend, and move down if it is downtrending.
  • Negative Directional Indicator (-DI) is a line that measures the strength when the price drops (downtrend) in a certain period. Usually -DI will move up if it is in a downtrend, and move down if it is in an uptrend.
  • Average Directional Index (ADX) is a combination of both +DI and -DI lines that have been 'filtered' with moving averages. The common setting of the period parameter is 14.
Traders should note that if the +DI and -DI lines cross, there will be a trend reversal. Simply put, if +DI crosses -DI from the bottom up, it indicates an uptrend is imminent. If the -DI crosses the +DI from the bottom up, then it indicates that there will be a downtrend. The average directional movement index does not actually indicate the direction of the trend (downtrend or uptrend), but to measure how strong the direction of the trend is. On the chart view, the ADX line will be separated from the candlestick and it is located directly below the candlestick chart. For example, the three components of the ADX indicator can be seen as follows. Before that, do a Preliminary Test to gauge how far your trading skills are.   [caption id="attachment_4046" align="aligncenter" width="1024"]

Indikator Average Directional Movement Index

ADX Indicator Display[/caption]

How to read the average directional movement index (ADX) indicator in forex trading

When the ADX line moves upwards, it means that the trend is strengthening and the market has a good chance of continuing the trend in the same direction. Conversely, if the ADX line is pointing downwards, it means that the trend is weakening and there is a chance that the trend will soon reverse.  The measure of trend strength in the average directional movement index indicator uses parameters from 0 to 100, which are divided into four categories, namely a value of 0-25 indicates that the trend strength is weak, a value of 25-50 indicates that the trend strength is strong, a value of 50-75 indicates that the trend strength is very strong, and a value of 75-100 indicates that the trend strength is more than very strong.

This measure of trend strength can be used by traders as an average directional movement index formula or a special 'formula' when determining positions in a trade. When the ADX indicator is below the 25 level or below both the +D and -D lines, then the market is in a range. The price moves in the area between the support and resistance levels, before determining the direction of the next trend movement. When the market is ranging, traders are advised not to place open orders until the market shows trend again.

Traders can also identify the potential beginning of a new trend in the market by monitoring the movement of the ADX line from below the 25 level to the upside as a signal that the market is heading towards a new trend. The longer the market is ranging, the more weight the market gives to the potential of this trend. The ADX indicator can also be used as a trend reversal signal.

When the ADX line moves above both the +D and -D lines, then moves downwards, this condition is often used as a signal of a trend change. The last way that forex traders can trade using this indicator is to look at the crossover or the intersection of the +D and -D lines. This condition indicates that buyers are stronger than sellers, so there is an opportunity to open buy.  The downtrend signal begins with the intersection of -D, from the bottom to the top of the +D line. This condition indicates that sellers are stronger than buyers, so there is an opportunity to open sell. After knowing how to read the indicators, you can fill out user surveys so that GIC can improve its performance.

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