How To Use The ADX (Average Directional Index)
The ADX or Average Directional Index is a technical analysis indicator which can be used for trading Forex, stocks, futures, commodities and other financial assets.
Using The ADX To Spot Oppurtunities
The ADX is an extremely useful technical analysis tool for forex traders that build a strategy based upon multiple indicators. Rather than indicate direction, the Average Directional Index indicates the strength of a trend.The ADX shows a scale of 1-100, with a reading above 25 considered a strong trend, and a reading below 25 considered a weak trend.
The ToniSignals team recommend using the ADX to enter when the trend is weak, despite popular consensus. This requires you to identify the trend direction, and then look for when the ADX goes below 25, indicating a weak trend. This strategy embodies Warren Buffets famous quote “be fearful when others are greedy, and greedy when others are fearful”.
For ease of demonstration we use the example in an uptrend.
Trading Against the Trend With The ADX
Trading against the trend is risky, as reversals are statistically less likely than trend continuations. That us why this strategy identifies a trend direction, a major key level and when the ADX indicates a strong trend.
First identify the short term trend - is it bullish or bearish?
Second identify a key level - a fibonacci level or a key support / resistance zone.
Thirdly once price reaches the zone check the ADX. Is it giving a “strong trend” signal? If the reading is above 25 it is a counter trend trade signal.