Trend indicator ADX

Discussion in 'Average Directional Movement Index' started by Profiforex, Nov 15, 2010.

  1. Profiforex

    Profiforex Administrator Staff Member

    This indicator can be hardly used on the Forex market. Its delays are too long for such a volatile market. Nevertheless, on the timeframes bigger than D1 this indicator can work well.

    ADX in rarely used along. It is the instrument to identify the market phase (trend or flat). Further, if trend phase is identified - trend indicators are used (for example, averages). If flat phase is identified - oscillators are used.
    Falling ADX shows that there is flat phase and it is better to enter against the market using oscillators (such as Stochastic, MACD, RSI).
    Growing ADX (that grew over 15) shows that there is a trend.
    On ADX chart we see three lines. The blue line represents ADX. Two dashed lines represent DI+ и DI- (Directional movement), that are the basis to calculate ADX. Now let's talk about these two lines.
     
  2. Profiforex

    Profiforex Administrator Staff Member

    These lines are identified for every sequential change. It is obvious, that between two separate time periods the movement can be only up (DI+) or only down (DI-).

    [​IMG]
    The picture shows all possible combinations of the minimum and maximum prices between the two bars and the methodology of DI identification for each case.
    After calculating DI it can be identified whether there is a trend. It is obvious, that DI+ will rise, and DI- will fall on the growing market. While on the falling market DI- will rise, and DI+ will fall. Each of DI represents the extent of ordered motion to each side.
     
  3. Profiforex

    Profiforex Administrator Staff Member

    we can calculate not just the absolute magnitudes of DI+ and DI-, but also their difference. Now the directional movement index for the particular period can be calculated:
    DX = 100% x (DI+ - DI-) / (DI+ + DI-)

    ADX also gives advice about when to take small profit, and when to wait for big incomes and stay in the deal. This ADX feature is rarely spoken about in literature, but we think that it is even more important than entry and exit strategy.
    The following table will help you:

    ADX valueeeeADX direction wwww Market conditions and indicators advisable
    0 – 10 tttttttIt does not matter w Flat. We use oscillators.
    11 – 15 ttttt Up wwwwwwwwwwt Flat. Be ready for the trend to start. Oscillators.
    16 – 40 ttttttUp wwwwwwwwwwwTrend. We use trend indicators.
    > 40 tttttttttUp tttttttttttttttttttttTrend. Because ADX has a delay, it is recommended to fix profit.
    20 – 40 ttttttDown tttttttttttttttttTrend ends. We use oscillators (but only in accordance with the trend).
    10 – 20 ttttttDown tttttttttttttttttFlat. We use oscillators.
     

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