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Assessing the Utility of ADX Indicator in Foreign Exchange

by jamescarlos

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People can resort to many different technical indicators in order to trade the foreign exchange markets profitably. Some make use of the highly popular forex indicators like Moving Averages, Moving Average Convergence/Divergence (MACD), Fibonacci Series, Stochastics, and Parabolic SAR while others like to use a bit less popular, but useful ones like Average Directional Index or ADX indicator, Bollinger Bands, etc. In this article, we’ll particularly shed light on the ADX forex indicator.

ADX was formulated by J. Welles Wilder, one of the most famous experts in the field of technical analysis. It is principally employed to notice trends in the forex markets in general and the strength of the prevalent trend in particular. Here, you should remember that it does not indicate you in which direction the trend is moving. You need to work this out on your own.

The question arises why this technical indicator is helpful for currency traders. Though there are many other forex indicators available to indicate trends, ADX has its own significant role to play. It essentially notifies traders when they must exit the markets altogether and they must either be in a position or mulling over occupying a position. Simply put, if the ADX indicator lies under the mark of 20, it suggests a market without any trend and is frequently shown by a slim trading range on the price chart of traders. Hence, you must make an exit from the market during this period.

On the other hand, if the ADX goes above 20 or 25 if possible and is still moving up, this points to an amplification of the trend. Therefore, if the price is going either up or down on the price chart, you must think about getting into a position at this point in time. As might be expected, you might opt for other forex indicators to reassert your entry point.

Normally, the greater the value of the ADX indicator, the more strengthened the trend turns out to be. Nevertheless, that does not automatically signify that you must enter a position when this FX indicator is at its utmost value, since oftentimes the indicator will turn back when it surpasses 50 or 60, for example and the trend will begin to lose strength.

The most favorable time to enter a position is usually when the Average Directional Index is going in the upward direction from the 20 or 25 region as this is the where the majority of trends will start to strengthen. Obviously, you cannot figure it out in this manner always. However, if you await this to take place at the same instant as the price attains a fresh high or low for the day, you can gain access to several lucrative breakout trades carrying high prospects.

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