The Average Directional Index (ADX) is considered to be a trend indicator. On the MT4 platform, this indicator is listed under the Trend Indicators. When looking at the properties of the ADX, the Parameters tab setting contains the period of time being looked at & the color & style of the line that represents the strength of trend. The recommended period we suggest is 14 (looking at the last 14 candles) and apply to the “Close.” Since we are using this with trends, we will primarily being referring to a daily chart, which means the ADX would be looking at the last 14 trading days.
The Levels tab will specify where the horizontal lines are drawn on the indicator. We suggest adding a level at 20 and 40. Anything below 20 represents a non-trending environment. As it climbs above 20, a trend is forming. Above 25 is considered to be when a trend exists. Once the ADX climbs above 40, you have a very strong trend. As the trend line rises, trend is strengthening; when trend line drops, the trend is weakening. The trend line represents strength of trend not direction. A very strong downtrend or a very strong uptrend would show the trend line above 40 and climbing as long as the trends continue to strengthen.
The idea would be to employ trend trading strategies when trends exist such as buying on pullbacks in an upward trend or shorting on bounces during a downward trend. When trends become absent as the ADX drops below 20, you would be looking at trading within a range. Strategies would be more along the lines of buying at or near support and selling at or near resistance. When used with other tools such as moving averages, the ADX can give confirmation to trends forming and trends ending.
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