Trading in the direction of the main trend is the first rule that novice traders will learn about. Trading “in step” with the main movement helps to reduce risks and at the same time increases the profitability of transactions. The difficulty for beginners is to find the start and end points of the trend to determine the direction and strength of its movement.
A Brief History of ADH
You can determine the strength of the trend using the ADX indicator. You will learn a description of this tool, its calculation algorithm and the rules by which it works in this article. We will also consider the options for its application in practice, consider its features, weaknesses and strengths.
The full name of this technical indicator is Average Directional Index. That literally translated from English means “Index of the average directional movement”. Traders usually call it shortly – “ADX” (abbreviation of the English name). In fact, the instrument is an oscillator and is used to determine the strength of a trend without taking into account the vector of its movement.
For the first time a description of the concept of directional movement or the ADH system was presented in 1978 in the book by J. Welles Wilder Jr. in his book “New Concepts in Technical Trading System” (“New concepts of technical trading systems”). Later, analysts were involved in the refinement and improvement of its system.
The structure of Wilder’s system consists of the following elements:
- Average Directional Movement Index – ADX (Average Directional Movement Index);
- Directional Movement Index – derivatives DMI (Directional Movement Index);
- One of these derivatives helps in assessing the strength of the trend.
By the way, this book also described other J. Wells’ instruments, known to us today, as RSI, ATR and Parabolic SAR. Created even before the first computers appeared, they are quite complex in calculations. Since their inception, they have proven themselves in practice and today they have not lost their relevance. They all underlie the most popular Forex indicator strategies.
For fans of indicator and non-indicator strategies, including supporters of the Price Action system, the Forex Academy offers for free the TOP-5 best strategies that have won the trust of a huge number of traders in a short period of time. The absence of any mathematical algorithms in its work, the absence of the need to use auxiliary trading instruments, the possibility of a risk-free acceleration of the deposit, a rapid increase in capital in a short period of time – this is only a part of the advantages of TS Sniper X.
What is needed to work with ADX?
To start trading with this indicator, a trader needs everything, the same as when working with other Forex instruments:
- Market: Any, including currencies, stocks, mutual funds, futures, etc .;
- Trading platform: the one that suits the trader is suitable;
- Installation on a chart: since ADX is included in the package of standard instruments of any terminal, traders usually have no problems installing it on a chart.
- Choosing a currency instrument: works equally well with all currency pairs;
- Choice of TF: for trend analysis it is better to choose higher timeframes, starting with H1 and higher, but the author himself recommended working on TF D1.
- Trading Time: The ADX indicator can be used in any trading session.
Setting and type of instrument on the chart
We go to the terminal, then follow the path “Insert → Indicators → Trend → Average Directional Movement Index” and pull out the indicator on the chart. After that, the ADH settings window will open, where the trader can change some of his working parameters and the style of visualization on the chart.
After installation, the instrument is located in its own basement window, as it should be for all oscillator-type forex indicators. In this window, it is represented by three multi-colored curves moving in the range of the scale with the minimum / maximum marks “0” and “100”, respectively.
How are ADX curves calculated?
This indicator is used to quantify the strength of a trend, and its calculations are based on the Moving Average of the price range expansion over a specific period of time.
The calculation of the ADX index is based on the calculations of the other two instruments, which were also created by Wilder, so that with their help you can determine the direction of trends:
+ DMI (or + DI from “positive directional movement indicator”, translated as “positive directional movement indicator”);
– DMI (or -DI from “negative directional movement indicator”, translated as “negative directional movement indicator”).