Average Directional Movement Index (ADX) Indicator Guideline
Average directional index or in short ADX indicator for MT5 was developed by the technical analyst “Welles Wilder” and he talked about it in detail in his book “New concepts in technical trading systems”. It is a trend indicator that is used to measure the strength of the trend in all types of markets (Forex, commodities, CFDs, cryptocurrencies, stocks, etc…). MT4 ADX indicator focuses basically on the momentum rather than the direction of the trend. Moreover, this technical tool enables users to measure the strength of the price action in two opposite directions, positive and negative. In this course, we will explain to you as a Forex trader how you can use the ADX indicator in Tradingview and MetaTrader platform.
What is ADX indicator ?
ADX is a tool used by Forex traders and technical analysts to measure the overall strength of a trend in the market. However, the direction of the trend can be up or down. Therefore, ADX is a mixture of two measures of price action. The first one is the positive directional tool, which known as +DI. The second one is the negative directional tool, also known as -DI. These two indicators display also with the ADX in a separate window below the chart. Each line of the three could be used to assess the trade and tell if you should take long or short. The +DI calculates the strength of the uptrend, while, the -DI calculates the strength of the downtrend.
Furthermore, the ADX strategy does not plot the positive and negative DI lines by itself, therefore you can use the DMI (directional movement index) to see them with the ADX.
How does ADX indicator work?
ADX MT4 indicator reflects the contraction or expansion of the price range over a specific period of time. The standard setting of the average directional index is 14 periods, but analysts commonly employed it with low settings reach to 7 and high settings reach to 30. However, higher settings will make ADX lag more but minimize false signals. While lower settings will make ADX quicker but provide more false signals.
Tradingview ADX indicator is like momentum indicators as it displays in a separate window above or below the price chart and oscillates between 0 and 100. In addition, this Tradingview indicator does not show the direction of a trend but it indicates the strength of the trend. A high ADX value results in a strong uptrend or downtrend. Therefore, using ADX with positive directional indicator and negative directional indicator can help chartists to determine the direction and the strength of the trend.
We can use the crossover of +DI and -DI to generate trade signals. Therefore, if the +DI line crosses beyond the -DI line and the average directional index (ADX) is above 20 or ideally above 25 level
Understanding average directional index
As we said earlier the ADX MT4 indicator displays three horizontal lines. The first line corresponds to the ADX itself, the second and the third lines correspond to +DI and -DI. These two indicators together refer to as the directional movement indicator. Forex traders then need to plot a horizontal line at a level equal to 20. Therefore, the ADX values below 20 indicate a weak and unclear trend. Whereas, if ADX values become above 20 this is a sign that the trend will go stronger and clearer. There is another line to be added to the average directional index indicator which equals to 40 level.
ADX Indicator formula
As the ADX MT5 indicator includes several lines, it requires a series of calculations which are presented as follow:
1. Compute -DM, +DM, and TR ( average true range) for each period. Typically 14 periods.
- Positive DM = Current high – prior high
- Negative DM = Prior low – Current low
2. When +DM > -DM, then use +DM. Similarly, when -DM > +DM, then use -DM.
3. The true range (TR) is the current high minus the current low, the current high minus the prior close, or the current low minus the prior close.
4. Smooth your chosen period averages of positive and negative DM and TR. After that, insert the +DM and -DM values to compute the smoothed averages of those.
5. First nTR = Sum of first n TR readings ( with n= number of periods). exp: n= 14, first 14 TR = sum of first 14 TR readings.
6. Next nTR value = first nTR – (previous nTR / 14 + current TR.
7. Then, you need to divide the smoothed positive DM by the smoothed TR to obtain the +DI value, then multiply it by 100.
8. Divide the smoothed negative DM by the smoothed TR to obtain -DI, then multiply it by 100.
9. The directional movement index (DMI) calculation is: | Positive DI – Negative DI / (+DI + -DI ) | * 100
10. You need to continue calculating the DX values for the n periods chosen, then smooth the results, To obtain the ADX.
11. First ADX = ∑ of n periods of DX / n
12. ADX =[ ( previous ADX * (n-1)) + current DX ] / n
How to trade with ADX ?
Before trading with the ADX MT5 indicator you need to draw two lines as we said earlier. A line at a level of 20 and the other one at a level of 40. Then according to these two lines and the three oscillator indicators (ADX, +DI, -DI), you make comparisons and make a trading decision.
- When the ADX is below 20, this means that there is no trend or the trend is weak.
- If the ADX indicator is between 20 and 25, means that there is a possible trend but not conclusively the presence of a trend, however, the market is considered ranging instead of trending.
- In case ADX is above 25, it is a signal that there is a genuine trend.
- ADX between 25 and 50 indicates the presence of an average strength trend.
- In the end, if the ADX is between 50 and 100, it indicates the presence of an increasingly strong trend.
We can use the crossover of +DI and -DI to generate trade signals. Therefore, if the +DI crosses above the -DI and the average directional index (ADX) is above 20, or ideally above 25, then it indicates that there is a likely signal to buy. While, if the -DI crosses above the +DI and the ADX is above 25, then there is a chance to enter a likely short trade.
Also, the crossover can be employed to exit current trades. If you are in a long position, exit when -DI crosses above +DI. Otherwise, when the average directional index is below 20 the indicator gives a signal that the price is trendless and it may not be the perfect time to enter a trade.
Download ADX indicator for MT4
ADX indicator is a technical tool for MT4 that can be used with any currency pair and at any time period. As you can see in the picture below this MT4 indicator displays below the chart with two other indicators which are +DI and -DI. The ADX measures the strength of the trend without giving any idea about the direction of the trend, which is why we use it with +/- DI indicators as they complete the ADX and provide the trend’s direction.
Download ADX indicator for MT5
ADX MT5 indicator is a custom indicator that you can add to your MetaTrader 5 platform. It is very helpful as it gives additional confirmation of trading entries and exits. Moreover, it computes the strength or weakness of a trend. This MT5 indicator is connected to the directional movement index, which represents +DI and -DI. These directional indicators can cross with the ADX to provide a complete trading system.
Download ADX indicator for Tradingview
Tradingview ADX indicator shows Three lines that oscillate between 0 and 100. ADX is a non-directional Tardingview indicator, which is why used with other directional indicators. This is why according to the movement of these lines mentioned in the picture, you can make trading decisions. Take a short or long position or even do not take any position at all.
ADX indicator for Tradingview and MetaTrader is a very useful tool as it identifies the overall strength of a trend. However, it is like any other technical indicator, ADX has some drawbacks like lagging. This means that sometimes does not indicate a trend until after it happened. So to solve this problem, you should combine it with other indicators to obtain more accurate signals.