The ADX indicator is great for identifying currency pair trend direction and momentum. It can also be a useful trading tool for spotting range bound market conditions when we may not want to use a trend trading strategy. That being said, the ADX trend strategy implements all of the different elements of this particular indicator in order to get the most out of it. I also like to keep an eye on price action including support and resistance along with any candlestick patterns. This can give additional confirmation before taking any long (buy) or short (sell) trades.
What is the ADX?
The Average Directional Movement Index (ADX) can be used to help measure the direction and overall strength of a trend. The ADX indicator is an average of expanding price range values. The ADX is a component of the Directional Movement System developed by Welles Wilder. It is primarily used for trend trading strategies although it can be good for spotting ranges to trade in.
How to use the ADX trend strategy?
The ADX has 3 main lines that we need to look at, along with an ADX level that we can add ourselves. We can combine all of these lines to find ADX trend trading signals and give our forex strategies that extra edge.
There is the main line which is used for gauging momentum. Generally speaking, when the ADX main line is above the 20 level, the trend is gathering momentum. The higher the line, the more momentum a trend has. If the main line starts to fall, then the trend might be losing momentum. If the main line is below the 20 level, the market may be range bound.
Then we have the ADX +DI and -DI lines. These are usually green and red which makes them easy to differentiate between. You can also adjust the colours if you want to. The general rule is that when the green (+DI) line is above the red (-DI) line, the market is going up. If the red (-DI) line is above the green (+DI) then the market is heading down.
What we want to do for this ADX trend trading strategy is to check that the ADX main line is above the 20 level and the +DI and -DI lines have crossed over each other in the opposite direction. This is known as the ADX crossover strategy. We will confirm trading signals with additional market analysis before taking any position.
Buy signal
- ADX main line is above 20
- ADX +DI crosses ADX -DI
- Price breaches resistance
- Bullish price action
You can see in the USD/CAD 1-hour chart below that the ADX has had a crossover to the upside and there is momentum in the trend as the ADX is above 20. We can see price has breached a recent resistance level and there are lots of bullish candlestick patterns including a double bottom formation. We could have placed the stop loss just below the recent swing low which would have been around 50 pips. That’s not bad when you consider this uptrend lasted for over 600 pips. You can see there are ample opportunities to enter this trend on the way up with other ADX trend strategy signals.
Sell signal
- ADX main line is above 20
- ADX -DI crosses ADX +DI
- Price breaches support
- Bearish price action
In the USD/CAD 1-hour chart below, you can see that the ADX trend is downwards, with plenty of momentum. Price has broken through a recent support level which is now acting as resistance. There is bearish price action including spinning top candlesticks. The stop loss could have been placed just above the resistance level which is around 20 pips. This downtrend continued for over 200 pips which gives a very favourable risk to reward ratio. There was ample opportunity to take profit on the way down. Towards the bottom, you can see a new level of support forming and some bullish price action. This might have been a good time to exit as the ADX main line had also lost its momentum, falling back below 20.
ADX trend strategy Pros & Cons
Pros
- Catch some big market moves
- Can be used on any currency pair
- Can be used on any chart timeframe
- Filter for range bound markets
- ADX indicator is free to use
- Easy to interpret signals
- Customisable settings
Cons
- Takes some time to learn
- Requires the user to take initiative
- Need to confirm each buy or sell signal
Conclusion: is the ADX trend strategy any good?
Yes, I think the ADX forex trend strategy can be a great way to get into some big market moves as we have seen from the USD/CAD examples on this page. The ADX indicator can easily eliminate range bound market conditions whilst clearly indicating the trend direction and momentum of any currency pair on any chart timeframe.
That being said, two different traders using the ADX trend strategy could get a completely different set of results. This can be due to the settings they use, trading discipline and money management.
I would want to cut losing trades short and let winning trades run. I would probably look to move the stop loss to break even and trail the position with a trailing stop to maximise each good trade. Nothing is more frustrating than seeing one bad trade wipe out a run of winners.
If you like the look of this ADX trend trading strategy, then you can always give it a try on a demo account. You can get a free demo trading account from most forex brokers. This will allow you to practice your trading strategies with virtual funds so that you can build up some confidence and improve your trading skills in the process.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
