How to Use the ADX Indicator You can practice by following various exercises through the article below. To be able to learn it, you only need to read the following article. Also make sure to follow GIC's Instagram so you can also find out today's market price conditions!

What is ADX Indicator in Trading?

The ADX indicator simply measures the strength of a trend and whether the price is in a trading or non-trading price movement. The ADX indicator by J. Welles Wilder is a very popular indicator for measuring the strength of a trend. Unlike the RSI, the ADX does not determine whether the trend is bullish or bearish; instead, it measures the strength of the current trend. The ADX (Average Directional Index) is a creation of technical analysis legend J. Welles Wilder that provides important information such as, informing traders when the market is trending and filtering out anti-trend trades to help the indicator catch trends from frequent whipsaws.

All About Average Directional Movement Index (ADX)

How to Read ADX Indicator



 First, ADX is used to determine whether a market is trending rather than just fluctuating within a range. Second, it is used to determine the strength of a trend in a trending market. Finally, it is also often used, like other momentum indicators, to indicate potential market reversals or trend changes. ADX is a lagging indicator, meaning that a trend must have already been established for the indicator to generate a signal that a trend is in progress. ADX values ​​range from 0 to 100, with high numbers indicating a strong trend and low numbers indicating a weak trend.

Trend strength reading:

  • ADX below 20: weak trend, the market is not currently trending;
  • ADX crosses above 20: suggests that a new trend is emerging. Traders may start placing sell or buy orders in the direction of the trend;
  • ADX between 20 and 40: growth between 20 and 40 is considered a confirmation of an emerging trend. Traders can use this as an opening to buy or sell short in the direction of the trend;
  • ADX above 40: very strong trend;
  • ADX crosses 50: very strong trend;
  • ADX crosses 70: a very rare occasion called “Trend Strength.”
The chart below shows the average directional index indicating a stronger uptrend as the average directional index reading rises from below 10 to nearly 50. Important: A falling ADX line does not mean a trend reversal (unless a price climax has occurred), only that its strength is weakening. Until the ADX is above 25, it is best to consider a falling ADX line as simply being less strong. So before you buy an asset when the ADX slope changes from down to up, remember that the ADX line may quickly turn back to the downside before a real uptrend occurs.

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Example of How to Read the ADX Indicator for Trading

Now let’s connect the dots and look at two markets and explore how the ADX indicator can help you understand these charts. On the AUD/NZD chart, there are 5 ADX signals and we have marked each one with a vertical line and an arrow indicating the direction of the signal. You can see that the first signal came in quite late and the ADX crossed 20 after the price had rallied and by that time, the DI lines were already quite separated; ADX signals are usually stronger when the DI crossover and the ADX 20-line-break occur at the same time (or relatively close). The following signals would have provided better entry opportunities but you can see that it is important to have an effective profit-taking and/or trailing stop method as not all signals will provide entries into long trend-following trades. As with any system, you must learn how to maximize winners and cut losses and small profits effectively.
zThe NZD/USD chart shows 6 different signals and we will discuss them one by one: 1) Relatively long entry into a decent rally. Once ADX hooked and dropped, price also started to reverse – “ADX hook” is a good exit signal. 2) ADX broke above 20 and gave a short signal but price soon reversed and went back below 20. In such a scenario, a trader should quickly cut his losses. 3) Nice short signal into a decent bearish trend. Staying in the trade will be a real challenge here as ADX showed a hook and then continued to trade lower. 4) An early long entry as price broke above the moving average with good profit potential. 5) Very nice long signal into a strong bull market phase. 6) Another nice short opportunity into a strong downtrend. ADX hooked once price stopped falling and entered consolidation. 

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How to Use the ADX Indicator As you can see, the ADX indicator, like any other indicator, does not provide 100% accurate signals but a trader who can find a way to maximize profitable opportunities while managing failed signals may be able to make good use of the ADX indicator. Let's recap what we have learned about ADX:
  • The ADX indicator has 3 graphs: the ADX line and two DI lines.
  • ADX indicator is a trend and momentum indicator
  • The ADX line measures the strength of a trend but provides no information about its direction.
  • Once the ADX line crosses above 20, it signals a strong trend.
  • Two DI lines analyze bullish and bearish candles
  • The DI line compares the absolute highs and lows of the candles.
  • When the line to DI crosses, it gives a signal
  • When the green DI line is above the red line, it indicates that the market is trending higher (and vice versa)

Trading Strategy Using ADX

ADX indicator trading rules will ensure that you only trade when there is a strong trend on the 5-minute chart or the daily chart. In this case, the best ADX strategy is a universal strategy that does the same thing regardless of the time frame used. Moving forward, we will look for sell opportunities. Step #1: Wait for the ADX indicator to show a reading above 25. Before we even look to see if the market is going up or down, we should first wait for the ADX indicator to show a reading above 25. According to the ADX indicator trading rules, a reading above 25 indicates a strong trend and the possibility of a trend developing. intraday adx indicator We all know that the trend is our friend, but without real power behind it, a newly formed trend can quickly fade. In order to gauge the direction of the trend, we also need to look at actual price action. This brings us to the next step of the best ADX strategy. Step #2: Use the last 50 candlesticks to determine the trend. For sell signals, look for price to develop a bearish trend. No matter what time frame you are on, we need a practical way to determine the direction of the trend. By using a sample size of 50 candlesticks to determine the trend, we ensure that we are trading in the present. We want to keep things simple, so if price is heading lower for the last 50 candlesticks, we are in a bearish trend. how to read adx Now, it is time to focus on the catalyst that will trigger our sell signal for the best ADX strategy.

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Step #3: Sell when the RSI indicator breaks out and shows a reading below 30. For our entry signal, we will use the RSI indicator using the same settings as the ADX indicator. Typically an RSI reading below 30 indicates an oversold market and a reversal zone. However, smart trading means looking beyond what the textbooks say. In a strong trend as defined by the ADX indicator, that is exactly what we want to see. We want more sellers to enter the market. So, we want to sell when the RSI indicator breaks out and shows a reading below 30. adx mt4 indicator The next important thing we need to determine is where to place your protective stop loss. See below… Step #4: The Protective Stop Loss should be placed at the last ADX high. To determine the best stop-loss location for the ADX strategy, first identify the point where the ADX made its last high before we entered. Second, find the corresponding high on the price chart from the ADX high and there you have your SL level. adx settings for 5 minute charts Last but not least, the best ADX strategy also requires a place where we need to take profits, which brings us to the final step of this unique strategy. Step #5: Take Profits When the ADX indicator returns below 25. The best ADX strategy only seeks to capture profits that arise from the presence of a strong trend. Once the prospect of a strong trend fades, we look to take profits and wait for another trading opportunity. To accomplish this, we take profits as soon as the ADX indicator breaks back below 25. An ADX reading back below 25 indicates that the prevailing trend is running out of steam. intraday adx indicator Note** The above is an example of a SELL trade using the ADX indicator trading rules. Use the same rules but in reverse, for a BUY trade. In the image below you can see an example of an actual BUY trade. Take a look: ADX indicator trading rules This trading strategy using the ADX indicator is very easy to implement if you follow the instructions that have been explained above. Also, make sure to follow the trading plan that you have previously set so that you can get maximum profits. If you want to learn other strategies, immediately head to GIC Academy or GIC Journal for other strategies. If you already understand the strategy provided by GIC, you can start trading by registering first. Start your trading with a capital starting from 150,000 Rupiah with GIC!