The ADX Technical Indicator - How Useful Is It?

There are lots of different technical indicators that people like to use to trade the forex markets. Some use the old favourites such as the RSI, Stochastics and MACD indicators whilst others, like myself, like to use some of the lesser known ones such as the Supertrend and Smoothed Repulse indicators. However in this article I want to discuss the ADX indicator in particular.

ADX stands for average directional index and it is an indicator that was created by J. Welles Wilder, one of the most renowned technical analysis experts. It is primarily used to detect trends in the markets, and more specifically the strength of the prevailing trend. It should be pointed out that it doesn't tell you the direction of the trend. You have to figure this out for yourself.

So why is this indicator useful for forex traders?

Well it basically tells you when you should be out of the markets completely, and when you should either be in a position or thinking about taking a position. In simple terms, if the ADX indicator is below 20, this indicates a trendless market and is often highlighted by a narrow trading range on your price chart. You should therefore be out of the market at this time.

If, however, the ADX is above 20 (and preferably above 25) and heading higher, this indicates a strengthening trend. So if the price is moving either upwards or downwards on your price chart, you should consider entering a position at this point. Of course you may want to use other indicators to confirm your entry point.

In general the higher the value of the ADX indicator, the stronger the trend. However that doesn't necessarily mean you should enter positions when this indicator is at it's highest, because very often the indicator will reverse when it gets above 50 or 60, for instance, and the trend will start to weaken.

The best time to enter a position is generally when the ADX is moving upwards from the 20 or 25 area because this is where a lot of the strong trends will begin. It doesn't always work out this way of course, but if you wait for this to happen at the same time as the price makes a new high or low for the day, then you can find some excellent high probability breakout trades.

So overall I can definitely recommend you consider using the ADX indicator when trading currencies. It really is a very useful indicator for highlighting the strength of trends, and alerting you to the start (and end) of new trends.