The ADX is one of the few trend indicators that appears in a separate window and measures the strength of a trend. Many investors confuse it with an oscillator.
Listed under the trend indicators category on the MT4 platform, it has 14 periods as the default setting. Moreover, it applies the closing values for every candle in the 14 periods.
The ADX window shows three lines; the ADX and two other lines named the +DI and -DI. These represent the DMI (Directional Movement Index) from which the ADX takes its values.
In this case, the -DI and the +DI are the black and red lines, respectively.
How to interpret the ADX Indicator
The ADX line shows how strong the underlying trend is. The higher the ADX rises, the stronger the trend. One of the things about the ADX that confuses investors is that it does not provide any information about the trend’s direction. The ADX rises both in bullish and bearish trends, showing only the strength of the underlying trend.
The indicator has a scale – between zero and one hundred – used when interpreting the ADX, or the strength of a trend. When the ADX is below 25 the trend is weak, or simply doesn’t exist, values between 25 and 50 show a strong trend, while above 50 to 75 indicate a very strong trend. Anything above 75 is considered exceptional market trending conditions.
The two DI lines provide the nature of the trend. When the positive DI crosses above the negative DI, the trend is bullish, and a bearish trend forms when the -DI crosses above the +DI line.
Above is the daily AUD/USD chart, showing the ADX indicator at the bottom and a horizontal brown line at the 25 level. This is because the 25 level signals the start of a potentially strong trade, and the moment the ADX crosses that level, investors enter the market. The vertical red line in the ADX window shows where the -DI crossed above the +DI, indicating the bearish direction of the potential new trend. The resulting trade corresponds to the latest downside in the AUD/USD pair.
One of the problems when trading with the ADX is where to set the target and the stop-loss level.
Some investors choose to place a stop loss at the top of the entry candle (if short) and target a decent risk-reward ratio. Moreover, they book half the profits by the time the trade reaches a 1:1 risk-reward ratio, while simultaneously moving the stop-loss order to a break-even level.
If there is one indicator that can measure the strength of the trend, it’s the ADX. Used correctly, and with strong money management rules, it can quickly become a trend follower’s best friend.
- The ADX measures the strength of a trend.
- +DI crossing above the -DI indicates the start of a bullish trend.
- The ADX has a maximum value of 100.
- The ADX rises in both bullish and bearish trends.