The ADX Forex Trading Strategy is based on the forex indicator called the Average Directional Index (ADX).
This forex trading strategy requires the following:
Timeframes: use 15mins and above
Currency Pair: Any
Indcators: ADX & 14 EMA
Here’s what you should know about the Average Directional Index Indicator:
- The ADX indicator is used to measures the strength of a trend and this can be useful to determine if a trend is weak or strong.
- ADX indicator will not tell you if the trend is up or down-it simply indicates the strength of the current trend regardless of whether it is up or down.
- When ADX indicator has High readings, it indicate a strong trend and low ADX readings indicate a weak trend.
- When the ADX indicator is showing a low reading then a trading range (or congestion) is likely to develop therefore you should avoid trading currency pairs with low ADX readings. Trade only currency pairs that have high readings.
- On some charting packages there are two other lines on the chart, +DI and -DI (the DI part stands for Directional Indicator). Ignore these lines. Trying to trade according to these two lines is your surest way to lose money-and its even caused more confusion.
The only thing that you should be focused with is the ADX indicator itself. Here’s a chart to make you understand better:
Refer to the chart above with the following bullet points below:
- In the chart above, the ADX indicator is the blue line .
- There are also two other lines, the +DI (dotted green) and -DI (dotted white), you should ignore these.
- Now, note in the chart above that there is an area in the brown rectangle box…This shows how the ADX indicator identifies trading ranges and times when the market is not trending.
- The ADX is showing a low reading and notice that the currency pair is trending sideways.
- Now look at what happens when the ADX indicator gets into higher territory, generally above 25. A strong trend develops!
Summary: If you are looking to trade the ADX indicator, then trade when the ADX indicator is above 25.
HOW TO USE THE ADX INDICATOR SCALE
To setup the ADX scale, follow the instructions shown on the chart shown below:
You will have a box pop up and then you can add ADX scale values like 25 as shown on the previous chart above.
If ADX is between 0 and 25 then the currency pair in a trading range. It is likely just chopping around sideways. Avoid Trading these.
Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.
When the ADX indicator gets above 30 then you are staring at a currency pair that is in a strong trend! You should be looking to trade these pairs when this happens.
Note:You won’t see very many currency pairs with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.
THE RULES OF THE ADX FOREX TRADING STRATEGY
The chart below shows the buy and sell setup and how to trade the ADX using 14 EMA. The steps are further below:
Buy Rules
- check to see if ADX is above 25
- then wait for a candlestick to close above the 14 EMA-that is your buy signal.
- place a pending buy stop order 1-2 pips above the high of that candlestick
- place you stop loss 2-5 pips below the low of that candlestick.
- set your take profit target at 3 times what your risked.
Sell Rules
- check to see if ADX is above 25
- then wait for a candlestick to close below the 14 EMA-that is your sell signal.
- place a pending sell stop order 1-2 pips below the low of that candlestick
- place you stop loss 2-5 pips above the high of that candlestick.
- set your take profit target at 3 times what your risked.
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