The ADX indicator has been a well used indicator trend indicator among traders. It has been highly rated for its ability to provide accurate information regarding momentum and the trend strength. This article analyses the components of the ADX and goes further systematically to outline the ways in which they can be utilized.
The ADX Line
The ADX indicator is made out of 3 lines. This includes the main ADX line which is usually black and 2 DI lines with one usually being green and the other one red.
Having an understanding of the ADX line is important. Its strength is usually determined by various factors. On the one hand, a rising ADX means that the trend is getting stronger. Conversely, when a trend appears to lose momentum or is reversing, then the ADX is usually going down. A sideways movement show a flat ADX.
The ADX does not show the direction of the trend. The ADX only tells how strong the trend is and whether the trand is losing strength.
The threshold of the ADX also matters a lot in terms of trend formation. The threshold works in numerous ways to determine the strength of the trend. For instance, if the ADX window reads at level 20.00, it implies that it is even. However, anything below that figure only means that the prices are in range. To view this, it requires that one should plot a vertical line at the ADX window at exactly the 20.00 level. The best status would be when it appears on the top as it implies a great strength that would probably continue.
About The DI Lines
The ADX indicator other side comprises an additional two DI lines. The red and green color codes DI lines are essential in many ways to the ADX functions. Aside from showing measurements of the trend strength, they are also known to provide their directional information. To enable the provision of trend information, these green and red DI graphs are usually calculated in a special way. Mainly, DI lines always compare the absolute candle highs and lows of ADX. The Forex ADX STRATEGY is as illustrated below.
? The rising of the Green DI, is an indication that the previous candle had a low, high / low as compared to the current candle.
? If the Red DI rises, however, it shows that the previous candle had a higher, high / low for an inside bar as compares to the current candle.
? Nonetheless, when the DI indicates 0, it is a way to imply that both the high and the low have not taken any direction at all, but have fallen into the previous candle.
About the DI Crossover Signal
In this case, ADX uses signals to show the strengths of trends. For instance, a signal is always given any time the DI signals are not parallel. An uptrend is normally detected when the red DI line crosses the green DI line. The uptrend, in this case, means that the highs and lows of the previous candles are both moving higher. Nonetheless, in an opposite situation, it shows that the lows and highs are going lower thus; the price has been decreasing with the previous candles.