One of the simplest and most effective strategies for trading forex is trading the trend. In fact, some of the most powerful trading strategies come from trend trading. A trend is a series of higher highs or lower lows, depending on the direction of the trend. Following a strong trend reduces risk when trading and can lead to increased profit.
The Average Directional Index (ADX) also known as the trend strength indicator, is used to determine when a price of a particular currency or asset is trending strongly. Some traders consider the average directional index to be the ultimate trend indicator.
How does ADX work?
ADX measures the overall strength of a trend. It does so by measuring the strength of price movements in a positive or negative direction. Welles Wilder, who developed the system, suggested that an ADX figure greater than 25 indicates that a strong trend is present. When the ADX is below 20 no trend is present. The model also points out that a rising ADX indicates a strengthening trend, with the value of the ADX being proportional to the slope of the trend and therefore the strength of the trend. Furthermore, when ADX starts to turn downwards from a high value, this could be a sign the trend is coming to an end. Meanwhile, the model states that if the ADX is dropping, this could be a sign that the market is losing direction. Trading a weakening trend could prove to be very challenging and could result trading losses. For this reason, it is best to avoid trend trading systems when the trend is changing.
How to trade ADX in MT4
The ADX indicator is available on the world renowned MetaTrader 4 platform, also known as MT4. The standard MT4 platform already comes with the ADX indicators so there is no need to download it separately.
First, open the chart of the pair you are looking to trade.
On the list of trend indicators select Average Directional Movement Indicator, drag and drop it in the chart.
MT4 will prompt you to enter a value for the period and you can change the colours to suit.
The most capable brokers offer their clients the possibility to trade forex through an MT4 account. Vantage FX is a broker that offers its clients this possibility. Vantage FX is an award-winning Broker based in Australia. It is a true ECN broker meaning that it has some of the lowest spreads in the industry and unparalleled execution.
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