The ADX index compared to MACD, RSI and Stochastic is less used indicator. Mostly long-term traders use it and mostly in stock trading. The ADX is used to measure and check quality of the trend. İt has very simple approach and display to use.

Keep in mind the indicator measures only strength but not directional of the trend. Trend and ADX may move in the same and opposite direction with the trend. In a strong downtrend, ADX will rise as it happens in strong uptrend. ADX will drop when trend weakens. We may say that ADX shows convergence in the beginning of strong uptrend and will show divergence when uptrend weakens. Vice versa, ADX will show divergence with strong downtrend and convergence at the end of the downtrend.
The levels of ADX shows quality of the trends. This allows us to choose the strongest trends to enter and ride it until it weakens.
To use ADX we will setup our chart like this:

To filter the trend strength, we look to ADX levels. Bes entrance will be above 25. If ADX climbs above 25 in uptrend we look for buy but option when ADX climbs 25 in downtrend we look for sell option.
ADX level expressions are:

We will setup our chart to trade with adx.
Timeframe: 4h or Daily
Adx: 14
Complementary indicators:
Stochastic Indicator -5
Support and resistance

Enter signal: We need to find trend and watch ADX to be above 25. If ADX is rising above 25 and there is clear trend then we are looking for trade opportunity in stochastic. Let's see what we can find in the chart above:
ADX is rising above 25 level. Price jumped above latest resistance zone then tested it as a support zone. Price also reached trendline. Stochastic is bellow 20. Looks like a perfect situation to make buy.

Exit methods:
Trader use several exit depending on the style of the trade.
1) Riding the trend:
Traders following trend line and exit market when price breaks the trend. We can use support levels for moving sl to save our gains.


2) We can also use stochastic to exit and re-enter the trade. We will exit the first buy when stochastic crosses 50 line down. We we re-enter buy when Stochastic crosses signal line and moves up while bellow 50 line. And repeat this till the end of the trend.

END OF THE TREND:
ADX can play important role in recognizing trend change or end of the trend.

As you can see ADX started to drop much before price break bellow trend line.


Hope this article will help you trade better.
Translate to English Show original