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Average Directional Movement Index - ADX Forex Technical Analysis and ADX Forex Trading Signals

Developed by J. Welles Wilder

 

This a momentum indicator used to determine the strength of a price trend; it is derived from the DMI – Directional Movement Index which has two lines.

 

+DI - Positive Directional Movement Index

–DI - Negative Directional Movement Index

 

ADX is calculated by subtracting these two values and applying a smoothing function.

Average Directional Movement Index (ADX)

 

 

The ADX is not a directional indicator but a measure of the strength of the trend which has a scale of Zero  to 100.

 

The higher the indicator value the stronger the trend.

 

A value of below 20 indicates that the market is not trending but moving in a range.

 

A value of above 20 confirms a buy or sell signal and indicates a new trend is emerging.

 

Values above 30 signifies a strong trending market.

 

When ADX turns down from above 30, it signifies that the current trend is losing momentum.

 

 

ADX combined with DMI - Directional Movement Index

 

Since the ADX alone is a directionless indicator it is combined with the DMI index to determine the direction of the currency pair.

ADX indicator combined with DMI- Directional Movement Index

DMI

 

 

ADX and DMI Index

ADX indicator and DMI Index

 

When the ADX is combined with DMI index a trader can determine the direction of the trend and then use the this indicator to determine the momentum of the prevailing trend direction.

 

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Forex Technical Analysis and Generating Forex Trading Signals


Buy Signal

A buy signal is generated when the +DI is above –DI, and the ADX is above 20

 

The Exit signal is generated when the indicator turns down from above 30.

Technical Analysis of ADX indicator- Buy Signal

Buy Signal

 

 

Sell Signal

A short signal is generated when the –DI is above +DI, and the ADX is above 20

 

The Exit signal is generated when the indicator turns down from above 30.

Technical Analysis of ADX indicator- Sell Signal

Sell Signal

Market Sentiment: Did you know that traders and market participants have been buying US Dollars because USD is the best currency to hold when there is a recession – this is because the dollar is held as the reserve currency by most central banks and during recession most traders also prefer to hold this currency, this is why USD is known as a safe haven currency. But now the market sentiment has changed and all the economies are on their way to recovery and most have even returned to economic growth based on the economic reports coming from these countries.

During times of economic growth traders prefer to sell the dollars they had bought and start buying higher yielding currencies. These higher yielding currencies include EURO and Great Britain Pound. This is why the Euro is starting to appreciate against the USD. The EURUSD is trending upwards; Crude Oil Prices have also started to move back up because demand of oil is growing because of the global economic growth, Gold is also in an upward trend because during economic growth the prices of commodities also go up because there is increase in their demand.

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