How to Use ADX to Increase Your Profits

How to Use ADX to Increase Your Profits

Submitted by adil on Tue, 04/01/2014 - 08:48

Sometimes it happens that you enter into a trend only to find out that it has already expired just because you were too late to respond. There are innumerable trading strategies that predict whether the market is going to be bullish or bearish or what will be the direction of the trend but does not indicate anything about trend strength. Sometimes these strategies will prompt you to enter the trade that will in turn bring zero or little income for you despite of the fact that trend moved in the predicted direction.

Average Directional Index (ADX) helps traders to prevent such mishaps as it is design to predict trend strength. If used in combination with other Forex trading strategies, ADX enables traders to fully understand the trend behavior and place only those trades that are likely to yield big profits for them.

It is important to note the ADX only informs traders about the strength direction and therefore, it is not a standalone Forex trading strategy at all. Furthermore, traders should always use ADX with other strategies in order to obtained desired results as it does not tell anything about the direction of the trend.

It is very easy to grasp Average Directional Index as well. It usually ranges on scale from 0-100 where 0 indicates a total lack of trend and 100 indicates a trend that is very strong. Similarly, the market is expected to move sideways if the index is very close to zero. In simple words, the market will maintain its value with minor corrections as it will not go up or down.

It is a good time to close the trade when ADX is at or close to zero because of many reasons. For instance, a sideways moving trend usually does not yield profits for traders. On the other hand, it is a great time to enter the trade when the ADX is high because it is an indication of very fast trend. Again, remember that ADX does not indicate whether the price will increase or decrease.

ADX will be ‘high’ when it is above 50 indicating a fast moving trend.  In other words, whenever there is a strong trend, ADX is going to be above 50. Readings below 20 on Average Directional Index scale are an indication of weak trend.

Following illustrations explains quite explicably how traders can use Average Directional Index to determine the trend direction.

As displayed by the chart, ADX in the first part of the graph is relatively higher and there is very strong bearish trend. The market starts swaying sideways as the trend comes to an end dropping ADX below 20. This is exactly where ADX could come to the traders’ rescue because while it approached towards end of the trade, it could help traders to close the trade and not to waste their time and money on currency pairs that are inactive and unprofitable.

The use of ADX in combination with other Forex strategies provides you a competitive edge over your rivals you need to considerably increase your profits.