Forex trading using ADX indicator identifies when the market is trending and when to expect a retracement to the Average True Range stop that is built-into the Trend ATR indicator. First, let’s review the basics of the ADX indicator. Forex trading using ADX indicator shows traders when to trend trade versus counter trend trade. If the ADX shows a trending market, without a magenta peak, then traders know to trend trade. When an ADX magenta peak appears, then the trader knows to counter trend trade.
Forex Trading Using ADX Indicator
- ADX measures both upward and downward movement using the Directional Movement Index calculation
- If the DMI positive is dominant then the histogram bars will be blue
- If the DMI negative is dominant then the histogram bars will be red
- If the market is beginning to trend the histogram bars will be a bright color
- If the histogram bars turn magenta, then the trend is strong
- If the ADX line reaches 70, then the market is either overbought or oversold
- If a peak appears with a magenta dot (peak being like the top of a mountain or upside down V) then a retracement to the Average True Range stop is expected
For example, in the chart below (Yen Currency Futures), there are five points marked. The ADX indicator is the indicator at the bottom of the chart. The Average True Range stop is the plus sign on the top (where price is).
- Point A identifies that price is trending strong but has become oversold (the ADX line is red). A retracement to the Average True Range stop is expected (40 pip move).
- Point B identifies when the market is non-trending. There is no momentum evident in either direction. Instead the market moves sideways forming an area that will potentially support price. These areas typically form when the market is turning over (accumulation phase).
- Point C shows that the market has started trending to the upside (ADX line is blue) and a magenta peak forms indicating a potential pullback to the Average True Range stop (potential 100 pip move only 50 pips realized).
- Point D shows that the market continues up to form another magenta peak. Again, a retracement to the Average True Range stop is expected (60 pip move).
- After the retracement at Point D, sellers were strong enough to take control of the market and make a new low.
- At Point E, a new magenta peak forms (ADX line is red) so we expect price to move back to the Average True Range stop (40 pip move).
Click on the chart to expand.