Check out how to use the ADX indicator Strategy for better trading results
Ever wondered if there was an easy way to identify strong intraday trends to trade? You’re in luck.The average directional index or ADX indicator can help you spot trends and time your entries and exits. This versatile tool works for any market and any time frame. In this article, you’ll learn a simple trading strategy built around the ADX indicator that you can use to trade futures, stocks, ETFs or forex. You’ll see how to spot the strongest trends, find good entry points and lock in profits along the way. By the end of this, you’ll have a repeatable process for intraday trading using nothing more than price charts and the ADX indicator. So buckle up, this is going to be a wild and profitable ride!
Understanding the ADX Indicator: Formula and Interpretation
The ADX indicator measures the strength of a trend and can help determine when the market is ranging or trending. To calculate the ADX, you’ll need values for the +DI and -DI.
Calculating the +DI and -DI
The +DI measures upward price movement, while the -DI measures downward price movement. To get these values:
- Calculate the high-low range: Subtract the lowest low from the highest high for a given period.
- Calculate the positive directional movement (+DM) and negative directional movement (-DM): The +DM is the portion of the range where the current high is greater than the previous high. The -DM is the portion of the range where the current low is less than the previous low.
- Calculate the smoothed positive and negative directional indicators (+DI14 and -DI14): Divide the +DM and -DM by the 14-period atr (average true range), then smooth using a 14-period moving average.
- The +DI and -DI values range from 0 to 100, with higher values indicating a stronger trend. When the +DI is greater than the -DI, prices are trending up. When the -DI is greater than the +DI, prices are trending down.
Interpreting the ADX Value
The ADX value itself ranges from 0 to 100. A higher ADX means the trend is stronger, while a lower ADX means the market is ranging. Typically:
•ADX below 20: weak or ranging trend.
•ADX between 20 to 50: strong trend.
•ADX above 50: very strong trend.
The ADX indicator can be a useful tool for intraday traders looking to trade with the trend. By analyzing the +DI, -DI, and ADX values together, you’ll get a good sense of when the market is ranging or trending, so you know the right times to buy or sell.
Using ADX Indicators for Intraday Trading Strategies
To effectively use ADX indicators for intraday trading, you’ve got to know what you’re looking for. The ADX measures the strength of a trend, so higher ADX values mean a stronger trend, either up or down. For intraday trading, look for ADX values above 25, which show a strong trend is in play.
Once you spot a high ADX, check which direction the trend is going. If +DI is above -DI, it’s an uptrend; if -DI is higher, it’s a downtrend. Look for the trending indicator (either +DI or -DI) to be rising too, not falling. That confirms the trend has momentum.
Look for entry points
With an uptrend confirmed, look for opportunities to buy when the stock pulls back a bit. You want to see the +DI line stay above -DI, showing the uptrend is still intact. Wait for the stock to start rising again, then buy. For downtrends, do the opposite—sell short when -DI stays strong and the stock drops lower.
Set stop losses
With volatile intraday moves, it’s important to set stop losses. For buys, place a stop loss order below the previous minor swing low. For shorts, place a stop loss above the previous minor swing high. Lock in profits by trailing your stop loss up/down as the trend continues.
The key is not to get in too late. Look for high ADX values and a strong trend early in the day. Then ride the wave using trailing stop losses to maximize profits. By following the ADX indicators closely, you’ll know when the trend starts to fade so you can exit before reversals hit. With some practice, this strategy can lead to nice gains in a short time frame.
The Best ADX Indicator Settings and Signals for Day Trading
For day trading using the ADX indicator, the following settings and signals will serve you well:
Use the 5-minute chart for active day trading. This allows you to see short-term trends and exit positions quickly. For less active trading, 15-minute charts can also work. Stick to intraday charts—the ADX indicator works best for short-term momentum, not long-term trends.
Look for ADX readings above 25, which signal a strong trend is in place. As ADX climbs from 25 to 50, the trend is gaining strength. Above 50 means an extremely strong trend. When ADX starts dropping from above 25, it usually means the trend is weakening or reversing.
- Buy Signal: When +DI crosses above -DI and ADX is above 25, it signals a strong upward trend. Go long.
- Sell Signal: When -DI crosses above +DI and ADX is above 25, it signals a strong downward trend. Go short.
Exit a trade when ADX drops back below 25, indicating trend momentum is slowing. Or use a trailing stop to lock in profits as the trend continues.
The ADX indicator can be highly effective when used properly for day trading. Be sure to always use stop losses, as trends can reverse quickly. And avoid going against the trend—only take buy signals when the trend is up, and sell signals when the trend is down. With practice, the ADX indicator can become a key tool in your day trading arsenal.
So there you have it, a simple yet effective ADX indicator strategy you can use for intraday trading. Don’t let the technical aspects intimidate you, once you start using the ADX indicator in your trading, you’ll see how intuitive it really is. The key is to look for those high ADX readings that signal strong trends, then watch for crossovers of the DI+ and DI- lines to time your entries. By using tight stop losses, you ensure you’re always protecting your capital in case the trend reversal doesn’t follow through. But when the strategy works, you can capture some really sizable gains. Give this ADX strategy a try in your demo account and see how it works for the stocks or markets you like to trade. You might just find a new tool to add to your intraday trading arsenal.
What are the components of ADX?