ADX (Average Directional Movement Index) is a group of directional movement indicators is used to measure the trend direction and strength and to recognize the “buy” and “sell” signals.
The indicator automatically includes 3 lines:
- Average Directional Index (ADX) itself (yellow line)
- Plus Directional Indicator (+DI) (green line) - difference between two consecutive highs
- Minus Directional Indicator (-DI) (red line) - difference between two consecutive lows
How to interpret:
ADX (yellow line) is used to determine if the currency pair is trending or not. A strong trend is in place when ADX is above 25 and there is no trend when ADX is below 20. There appears to be a gray zone between 20 and 25.
+ DI and -DI (green and red) define the directional movement. In general, the bulls prevail when +DI is higher than -DI, while the bears have the edge when -DI is greater. Crosses of +DI and -DI make a trading system in combination with ADX.
“Buy” signal occurs when +DI crosses above -DI (ADX must be above 25). Stop-loss is usually put at the low of the signal day. The buy signal remains in force as long as this low holds, even if +DI crosses back below - DI.
And vice versa, “Sell” signal occurs when -DI crosses above +DI (ADX must be above 25). The high of the signal day becomes the initial stop-loss.
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