The Average Directional Index commonly known as ADX is one of the most powerful indicator to determine the trend strength. It comprises of three inbuilt unique feature. “The +DI is the bullish directional indicator, the- Di bearish directional indicator and the blackline is the trend strength indicator.” Professional traders use this indicator to determine the strength and reliability of the prevailing trend. When the positive directional movement +DI is trending up its represents significant amount of strength in uptrend. Strong Bearish momentum is represented by sharp sloping of the -DI directional movement indicator.
Let’s see an example ADX indicator
Figure: Use of ADX in trend reversal and strength indication
The green line or positive direction +DI line usually stays above the redline or-DI line in an uptrend. The distance between the two line increases with the increased strength of trend momentum. In a down trend the –DI line stays above the +Di line indicating that bears are in control of the market. The back line shows the strength of the prevailing trend of the trading pair.
Trader can look at the ADX value to determine the prevailing trend strength. When the value of ADX lies between 0-25 it means the market is ranging, or the trend is very weak. A value 25-50 represents a strong trend in the market. Value around 50-70 is the sweetest number for trend lovers. Professional trader often says that it’s the perfect situation of a trending pair. When the value stays 75-100 it means the prevailing trend is extremely strong. “Professional traders often consider 75-100 area as risk trading area since deep correction can happen at any time when the currency pair is heavily trending.”
ADX in technical analysis is extremely powerful combined with previous support and resistance level. Almost every professional traders use key support and resistance area before taking trade with the help of ADX.