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Chapter 12, Part VII. Average Directional Move Index – ADX. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Chart #1 | GBP/USD Weekly and ADX (10)

    In general there are 4 signals that created by ADX Indicator:

    1. When ADX stands in 20-25 range, then there is no significant trend on the market. Usually it happens when market volatility is shallow and market shows sideways move or stays in the range. On our chart you can see, that in beginning of 2008 and at the end of 2009 the market stands in range, so there was not a significant trend in this period.

    2. When ADX rises above 25 and shows some acceleration towards the 40-50 area, then it points to a trend acceleration and its growing power.

    3. As a derivative from the previous point, the jump of ADX by more than 3 points in two side-by-side trading sessions is an early warning that a trend has appeared. This property is very useful and popular amongst traders that use ranging strategies. For instance, if ADX has jumped for 3 points – then the possibility exists that market is turning to trend action and it’s time to exit. This is like a filter to understand whether the market in ranging price action or trending;

    4. When ADX starts to decrease down from the 40-50 area it points that the power of trend is becoming weaker, and it starts to exhaust. This is an early caution, that possibly it’s time for gradual exit if you still hold your position with the trend.

    All these scenarios you can see on Chart #1. Pay attention, as we’ve said that ADX does not show direction of the trend, it does not give you “Buy” or “Sell” signals. It’s just tells you how strong is the trend, whatever direction it is.

    ADX signals are better to use as a confirmation of some possible breakouts. If, for instance, market has shown downward break and ADX jumps at least for 3 points, and after couple of days moves above 25 – then it confirms that possibly a new bear trend has appeared. Then, you may use the nearest retracement to Fib resistance for entering a trade.

    Because of the fact that ADX does not tell you whether buy or sell, it’s obvious that you should use it with other indicators. And, finally, according to last 4th point – it could give you early notification, when it starts to decrease below 40, that possibly, it is time to close your position.

    Pipruit: Hm, interesting indicator. Possibly I will use it.​

    Commander in Pips: Yes, it could be useful. Of course you will have to experiment with them first, to study how to use it, and to find appropriate tuning parameters.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
    #1 Sive Morten, Dec 20, 2013
    Lasted edited by : Mar 24, 2016
    Hamza Samiullah and fran alvarez like this.
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