Learn how to Trade Momentum Using the ADX Indicator trading strategy

Do you want to know more about forex indicators and average directional index? Watch our latest video to learn how to profitably trade momentum using ADX indicator trading strategy.

ADX indicator trading strategy – A simple explanation

The Average Directional Index or ADX, is a momentum indicator that you can use trade financial instruments. It comes with 3 lines, two which shows the directional strength of both positive and negative movement, and then the ADX indicator itself.

Most traders ignore the other 2 lines, and for the purposes of this video I will focus on the actual indicator line itself. It is the solid green line, and what it measures it is the actual strength of the trend. It is not dependent on whether or not the trend is up or down, just that it has strength. In other words, it rises when the trend strength is strong, and declines when it may be weakening. The weaker the trend, the more likely you are to see consolidation.

When traders use the ADX, they are trying to find a real momentum. So in other words, if we get a break out or some other type of buying signal, traders will often use the indicator to see if there’s any real indication of underlying strength. After all, there are such things as “false breakouts”, which are sudden moves that completely reverse themselves. By using this indicator, you can perhaps avoid some of those. Also, it can tell you sometimes when we are starting to run out of steam, and therefore might be time to step away from the trend and close your position.

As you can see on this chart, we have several levels market, and for the purposes of this demonstration I have the 20 and the 60 levels marked. As we started to rally in early April in the silver markets, you can see that the ADX shot straight up towards the 67 level. This is the sign of a strong trend. However, you can see how quickly the ADX turned negative, and started falling precipitously. This proceeded sideways action and then eventually a pullback. If you are using this indicator, you would have been warned ahead of time to get out of this trade.