Today we’re going to learn about the ADX indicator or as its referred to as the average directional movement index in our metatrader platform and how we can use this tool for developing our forex trading strategy.
The average directional Index or ADX, is an indicator that is use to determine the strength of a prevailing trend. The ADX is measured on a scale from zero 100 with a series of lines that illustrate the trend, the strength of the positive direction and the strength of the currencies negative direction. These series of lines are actually three indicators all built in to want into the one ADX.
There are 2 direction movement indicators, one of them being the positive directional movement referred to as the green line in the video. The negative directional indicator in the video is the red line, between these 2 lines you can see the fight between the bulls of the bears and who is dominating that fight. When the green bull line crosses the red bear line then we see that the bulls have just taken charge of the currency pair and can be marked by the change in price movement.
An aggressive buy signal could be taken when the green line crosses the red and vice versa when the red crosses the green without taking into context the blue ADX line.
The blue ADX line is a measure of the strength of the trend for the foreign currency pair. When the ADX line is above 20 or 25 for our case in the forex trading video is an indication that currency pair is trending (we only trade during trending markets remember). We then watch the ADX line and should be in a position on that currency pair and ride that trend as it approaches and even exceeds a value of 40.
Here is when the fun kicks in. Currency pairs can remain overbought of oversold for extend periods of time which is what we always hope for (well when we are making money on a move). So what we watch for is for when the ADX line crosses the 40 line and then moves south towards the 20 line. This is our indication that the trend is over.
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