How To Use The ADX Indicator When You Learn Forex Trading

ADX is amongst the most widely used trading indicators in the world. It is also one of the most taught throughout credible Forex trading training programmes. The reason why it is so popular is because it helps a trader decide whether a trend is about to appear. When you learn Forex trading you will soon notice that the trend is your friend and there are many strategies out there that enable you to ride that trend in order to reach profit target.

Definition

ADX is an abbreviation of ‘Average Directional Index’. It is derived from another two indicators – the positive directional index (+DI) and the negative directional index (-DI). +DI measures the strength of an up-trend while the –DI measures the strength of a down-trend. These two measurements play a huge role in calculating the ADX. When you learn Forex trading you will see that the ADX does not measure the up-trend or down-trend separately but rather, it gives you an indication of the current trend’s strength. For example, if your charts are showing an uptrend, its strength is represented by the ADX.

How to use ADX

Believe it or not, a lot of Forex trading training courses out there teach the ADX’s importance in the same manner but the way to use it slightly differently. The most ‘old school’ way to use ADX is by using the magic number 40. Once the ADX crosses the number 40 it usually means that there is a strong trend in the market – that could be an up-trend or a down-trend depending on the charts you are looking at. For instance, if you see an up-trend on your chart that is starting to form and the ADX indicator crosses number 40, this is a very strong indication that an up-trend is about to begin. If you are looking at the same chart with an up-trend forming but the ADX line is below the number 40, you should ignore the up-trend.

In the recent years however, that number 40 is facing a contender – the number 25. It is used in the exactly the same way as described above except we use the number 25 rather than number 40.

When you begin to learn Forex trading, it may be worth testing both parameters, the number 25 and 40 to see which is the most effective for you. There may be a difference in opinion if you trade Forex or company stocks. Rather than guessing, have a look at historical chart patterns and decide which is best suited to your trading.