ADX can generate potential buy and sell signals. However, the main purpose directional movement index forex the ADX is to determine whether a stock, future, or currency pair is trending or is in a trading range.
Determining which mode a market is in is helpful because it can guide a trader to which other technical analysis indicators to use. ADX Shows Trend Strength The first concept to remember is that the direction that the ADX moves doesn’t depend upon the direction of the underlying stock. All the ADX shows is the trend strength. As can be referenced from the chart of the E-mini Russell 2000 Index Futures contract above, when the e-mini future was rising in a strong upward trend, the ADX indicator was rising. When the e-mini futures contract moved into a non-directional consolidation phase, the ADX decreased.
Buying low and selling high is accomplished quite readily with oscillators in a non-trending market. Unfortunately, during trending markets, oscillators perform quite poorly, often selling short during a bull market run or buying during a bear market downtrend, adding up to large losses. The importance of the 20-level and 40-level, along with more examples of the ADX in action, is covered on the next page. The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product.
Past performance is not necessarily an indication of future performance. ADX indicator and is used as a rating of the Directional Movement while smoothing out ADX values. If to compare ADXR to ADX, the smoother ADXR doesn’t depend much on fast short-term market turns and reversals, which allows to minimize trading risks when relying on ADXR in the long term. When ADXR is above 25 – use a trend-following system. When ADXR drops below 20 – avoid using trend-following systems, instead use oscillator based systems for calm, non-trending or range-bound markets. D- indicates a strengthening bullish market. A cross of ADXR and ADX lines can also be used for evaluating changes in the market.