Wouldn’t you prefer to know the strength of a trend no matter which direction that trend was headed in? Knowing how strong a trend is can potentially help you decide how large of a trade you should place on that currency pair as it moves about. What tool can you use to make this happen? The ADX (Average directional index) of course.
Reading The ADX
The ADX has readings between 0 and 100, but the two numbers that you want to pay a lot of attention to are the numbers 20 and 50. A reading below 20 means that the trend is rather weak, while a reading of 50 or above means that the trend is particularly strong. If you notice a reading above 50, you can feel pretty confident that the trend that you see in the markets is legitimately forming, and you might even want to jump in on that trend as soon as possible.
What the ADX Does NOT Do
Don’t get confused when using the ADX and think that it is providing you with any information at all about the direction of the trend that you see forming. That is not what it is designed to do, and that is not what it does at all. Instead, the ADX acts only as an indicator of how strong a particular trend is. Reading the ADX only means that you get some idea of the momentum behind the trend that you are looking at. It does not tell you if the trend is likely to be bullish or bearish.
You will need to use other indicators and basic chart reading skills to see if the trend on the pair you are reviewing appears to be bullish or bearish.
What You Can Do with the ADX
The way to use the ADX is to review the numbers that it is throwing out to see how strong a trend appears to be at any time. This might prove helpful when trying to identify if you are working with a strong or a weak trend. Here are some of the things to remember about the indicators on the ADX:
Rising number: Strengthening trend
Declining number: Weakening trend
Below 20: Weak trend
Between 20 and 40: Stronger trend
Above 40: Extreme trend
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