Forex Charts - Using The ADX Indicator For Bigger Profits

If you're using charts, then you want to trade the strong trends - and the Average Directional Movement Index Indicator, or ADX, enables you to do this.

Wells Wilder developed the ADX, and outlined it in his classic book "New Concepts in Technical Trading Systems".

Let's look at this essential indicator in more detail - and see how to apply it on your forex charts, to give you greater accuracy when generating your trading signals.

Determining the Strength of the Trend

The ADX is a momentum indicator, which aims to measure the strength of the trend - and attempts to determine if the market is trending, or is trading sideways.

The Advantages of the ADX

A core belief of technical analysis is that a strong trend in motion is more likely to continue, than reverse. Therefore, you always want to be trading strong trends - as your odds of success are higher. The Average Directional Movement is a good indictor - and you should consider using it as part of your currency trading system.

The Technical Bit

For the boffin's out there, here's the technical bit - don't worry if you don't understand the calculation, its easy to use when visually plotted. The ADX is based on the comparison of two other directional indicators, both of which were also developed by Wilder, and they are:

Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) to produce ADX as showed in the following formula:

ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N

Where:

N: Refers to the period of calculation. The formula above produces the ADX line, which oscillates between 0 to 100 values. The +DI and -DI are both present and can be seen to make up the indicator.

You don't need to understand the above calculation to use the indicator - you only need to accept that the indicator works.

The indicator is easy to use when it's visually plotted - and you'll find it included, with most of the good forex chart services.

How to Trade using the ADX Indicator

The ADX it's not a bullish, bearish trading signal generator - and should never be used as such.

The ADX indicator simply indicates the strength of the trend - and other indicators should be used to enter, and exit trades.

Although the ADX fluctuates from 0 to 100, it rarely moves above 60.

Use the ADX in the following way:

Readings above 40 indicate the strength of the trend.

Readings below 20 indicate range trading and flat periods of consolidation.

You can use the crossing of +DI and -DI to determine the trend direction; when +DI crosses -DI upward, it's a bullish signal, on the other hand, when +DI crosses -DI downward it's a bearish signal.

The ADX line is a great momentum indicator and like the RSI (also developed by Wells Wilder), the ADX it will help you trade the strongest trends - and give you advance warning of changes in momentum.

The Bottom Line

If you want currency trading success, you can't just trade support and resistance levels, and hope they hold or break. You need confirmation of momentum to get the odds on your side - and the ADX indicator will assist you.

Final Words

New Concepts in Technical Trading Systems was published in 1978, and was one of the first trading books I ever bought. Every trader should make this book a part of his or her forex education. If you want to learn forex trading the right way, get the book, and use the ADX indicator to increase your chances of making big FX Profits.

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The Best Forex Robot in the World For Consistent Profits

Forex robots are software programs that automatically trade the forex market with the intention of turning a profit. Although I do have an opinion on the best forex robot in the world, there is one major thing that must first be addressed that most traders do not now know when they purchase one of these programs.

These forex robots actually have settings that must be maintained if a trader is to keep the robot at its full potential, otherwise it might start off making the trader money, but then the profits will begin to slowly decrease as the weeks go by.

Any trader who trades the forex market knows that the market is usually in either one of two conditions. It is usually either ranging or trending, and most traders also know that the current condition affects how a stop-loss and profit-level will be set. This is also the same for forex robots. The settings for them are the same no matter what condition the market is in, but this is why the settings need to be changed based on what condition it is in. This will not only make the robot more profitable, but you will not see it drop down into losses, which is what most traders see after a certain number of weeks.

If you wish to trade manually, then you have years worth of demo trading and learning to become very successful. Getting a forex robot to trade for you can be a shortcut to profits, but you must at least take your newly purchased robot and demo trade with it and learn how to maintain its settings week after week.

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Relative Strength Index RSI - An Essential Indicator for Bigger Profits

The Relative Strength Index RSI is a popular and powerful technical analysis oscillator which has numerous applications including:

Indicating the strength of a price trend and also generating buy and signals with price divergences. The Relative strength Index is quite simply one of the best indicators to use with your forex charts so let's look at it.

Background

The RSI, as its name implies measures the relative strength of price currently compared to its past price. The RSI was developed by J.Welles Wilder and was outlined in his classic book "New Concepts in Technical Trading Systems" published in 1978.

The RSI does not show just the markets strength - but the strength compared to the markets former price history.

The RSI is calculated as follows:

Do not worry if you don't understand the mathematics, this indicator is very visual and you can simply watch the set ups - you don't need to know how an internal combustion engine works to drive a car and it's the same with the RSI.

For those who like math here is the calculation:

Within a set period of days - the individual difference between the upward closing prices (Close today Close previous day) are added together - the number is then divided by the number of observations in the period chosen minus one.

The end result is the day's mean value of the upward and downward strength of the market which is then displayed visually.

Keep In Mind

The shorter the Period of time used for the RSI calculation, the more volatile the RSI will be. The RSI indicator has a default of 14, which is the value Wilder originally used when he calculated it. Other values have become popular and include 9, 11, and 25 day periods.

Using the RSI

1. Divergence of Price and RSI

Say the market makes new highs on the chart but the RSI fails to get above its previous high - this would indicate that the trend is starting to falter and is running out of momentum.

Here Traders would be alert for trading signals to enter contrary to the current trend.

2. As an Overbought / Oversold Indicator

The RSI measures the market's strength and weakness as we have already seen and works very well as an overbought oversold indicator on forex charts.

An RSI, above 70, indicates an overbought bull market and an RSI below 30 indicates and oversold bear market.

When these levels are reached, traders would be looking for a price break and to execute trading signals in the opposite direction.

Combining RSI Other Indicators

By indicating the strength or weakness of price the Relative Strength Index acts as a leading indicator, to alert you to changes in the trend.

The RSI can be used by long term trend followers or swing traders and is simple and easy to use.

Like all indicators it doesn't work all the time.

To confirm trading signals, it should be used with other momentum indicators and perhaps the best is the stochastic - to actually trigger the signals, once the set up has been spotted on your charts.

The Relative Strength index is now nearly 30 years old - but just like the other indicator Wilder outlined in his book (Average Directional Movement ADX) its a timeless indicator, which will enhance any Forex trading strategy.

Try using it with your forex charts, combined with the stochastic indicator and you will trade with greater accuracy, great profit potential and enjoy greater currency trading success.

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