Though the Average Directional Movement Index (ADX) indicator, developed by Welles Wilder, is not one of the most applied trend indicators in the Forex market, it is an indicator the traders come upon.
ADX, which helps us see how strong or weak the trend is, is formulated via a 14-period moving average. Even though it is an indicator that moves between 0 and 100, it doesn’t show above the level of 60 too often. The value below 20 indicates the trend is weak and the value over 40 indicates the trend is strong.
What is paid the most attention to while interpreting the indicator is the course that takes place after the + DI and –DI intersection. If + DI creates an upward exit by cutting -DI from the bottom, positive pricing behavior for the financial asset subject to purchase and sale is expected. If the + DI creates a downward movement by cutting -DI from the top, negative pricing behavior for the financial asset subject to purchase and sale is expected.
We will change the + DI part as Green and the -DI part as Red in order to convey the indicator interpretation more clearly on the graph.
In order to reach the Average Directional Movement Index (ADX) indicator from the MetaTrader platform, you can respectively click on Toolbar, Insert, Indicator, then click on “Trend”.
The Condition/ Interpretation of The Market Expectation Being Positive
For the positive expectation for the financial product considered for making a trade decision to be included in the agenda, there is a need for + DI to cut -DI from the bottom and create an upward exit in the ADX indicator.
The Condition/ Interpretation of The Market Expectation Being Negative;
In order for the negative expectation for the financial product considered for making a trade decision to be included in the agenda, there is a need for + DI to cut -DI from the top and create a downward exit in the ADX indicator.
While making a buy-sell decision regarding the asset price with the + DI and –DI intersection in the ADX indicator, what needs the most attention to is whether the current signal is in line with or against the trend.
If ADX or any other indicator gives a SELL signal while it is in an uptrend and a BUY signal when it is in a downtrend, the risk coefficient in these signals is more compared to BUY signal when in an uptrend and SELL signals when in a downtrend. This is why it is important to participate in trend-oriented signals to minimize the risk since this indicator is an indicator that helps us see how strong or weak the trend is.
No matter what the indicator is, you should never make a BUY- SELL decision by using only one indicator. You can decrease the risk coefficient by using more than one indicator / technical analysis technique and make a BUY or SELL decision in line with a common decision.