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Average Directional Movement Index (ADX)

J. Welles Wilder developed the Average Directional Index (ADX) to evaluate the strength of a current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.

 

There are three lines in the indicator graph, a trend following line, a positive directional line (+DI) and a negative directional line (-DI). The Blue line tracks trends, the green line (+DI) is a signal to go long and the red line (-DI) is a signal line to go short. What we do is to wait for the blue line (trend line) to rise from below 20 to above 20. That means a trend is being developed.


The simplest trading method based on the system of directional movement implies comparison of two direction indicators: the 14-period +DI one and the 14-period -DI. When the green line (+DI) crosses above the red line (-DI), it is a signal to go long. And vise versa, when the red line (-DI) crosses above the green line (+DI), it is a signal to go short.

 

adx

 

You can use this technique for any currency at any time frame. We have to use Parabolic SAR with default settings (0.02, 0.2) and ADX 50 (with +DI, -DI lines).

 

Entry Rules for Short: Sell When the +DI line (Green) is below the -DI line (Red), and Parabolic SAR gives sell signal. When the +DI line (Green) is above the -DI line (Red), all Parabolic sell signals must be ignored.

 

Entry Rules for Long: Buy when the +DI line (Green) is above the -DI line (Red), and Parabolic SAR gives buy signal. When the +DI line (Green) is below the -DI line (Red), all Parabolic buy signals must be ignored.

 

Exit rules: when +DI line (Green) and -DI lines (Red) have crossed again.

 

Note: Blue cross indicate not to enter Forex Market. See rule above.

 

adx

 

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Click here for the Next Article: Moving Average Convergence/Divergence (MACD)

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Forex Indicators

Average Directional Movement Index

Moving Average Convergence/Divergence (MACD)

Stochastic Oscillator

Relative Strength Indicator (RSI)

Moving Average

Bollinger Bands

Fibonacci Indicator

 

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