The Average Directional Index on a Forex Trading System

Forex market traders utilize a wealth of economic and technical based indicators to develop market strategies. While economic indicators are published in most Forex journals and leading economic journals (as well as publicized on most news channels), technical based indicators or charts are available on most Forex trading system platforms. These charts help the Forex trader plan trades on a systematic basis. One popular technical indicator that is often used is the Average Directional Index.

It sounds like a mouthful!

The Average Directional Index (ADX), developed by J. Welles Wilder, is designed to measure the strength of a current trend, whether it’s an up or down trend on a Forex trading system. It does not foretell trends; rather it tells the Forex investor if the established trend is gaining strength or not. That’s extremely beneficial to a trader since it helps define momentum of a trend. If a trend is beginning to weaken, then that can mean that the trend can eventually end and even change direction. In that case, an investor might choose to wait on placing a buy or sell trade on a Forex trading system until the trend either reverses or strengthens once again, or decide to exit when a trend begins to weaken.

A little bit of the technical stuff

Without going into much detail, the ADX basically utilizes three lines to determine overall trend strength: the ADX line; the +D1 line; and the –D1 line. The +D1 line represents the strength or weakness of the up trend, while the –D1 line represents just the opposite (the strength or weakness of the downtrend). The ADX line takes both these lines into account on a Forex trading system chart by averaging the strength or weakness of the two lines. An ADX line above 40 indicates to the trader that the existing trend is strong, while an ADX line below 20 indicates a weak or zero trend.

When to place that trade

An investor who is a trend trader would usually place a trade if the ADX line is above 40. However, even with an ADX of less than 20, an investor might be interested in placing that trade since it might signal the beginning of a new market trend.

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