Deeper Insight

The ADX is one of my favorite indicators. I use it to help find the direction I want to trust for trends and possible reversals.

The distance between the +DI and -DI readings can show who is currently in control of the move. The ADX line itself, shown as the orange line, helps measure how strong the current move is.

If the ADX is below 20, I usually start looking for shapes or structures that could signal the beginning of a trend. When the ADX is above 60, that is when I start looking for possible reversals, exhaustion, or a reason to wait.

The picture above shows what the ADX can look like during a strong trend.

When the ADX looks like the image above, it is usually best to trade the strong zones you see because there is a good chance you are in a ranging market.

If you use the price confirmation tip with your trades, and you journal what the indicators looked like before, during, and after the trade, you will start to build a much clearer picture of what works for you. Compare the indicator reading to why you took the trade, what price structure was present, and how the trade played out.

You will always have questions that need to be answered, but that is part of the process. That is how you build a system that fits the way you see the market.

The image above shows what the ADX looks like during a strong trend. Notice the white lines showing possible entry opportunities. The stronger the trend is, the harder it can be to trade, especially with HFX. I say that because the last entry opportunity is a little more risky since the ADX reading is over 60.

As you trade, you will start to see what I mean. There are other indicators you can use when you see a good setup in the middle of a strong trend and want to confirm if the direction is still worth trusting. But if you do that, you are choosing to override the rule of waiting when the ADX is above 60, so you need to know why you are making that decision.

Notice how the ADX line dropped even though the market squeezed in an area for a bit. The ADX line only rises when one side of the market has more control than the other. That means once the waves of volume stop consistently holding above the average strength of the move, the ADX line will begin to drop.

If you look further down in the ADX example, you can see the ADX and DI lines all jumbled together. Now look at how the market was moving during that time. Price was ranging before a breakout. Then notice how the ADX started rising from the 20 area once the move began to gain strength.