Numerous indicators tell traders about the direction of the trend. However determining the strength of trend is also important. Using the moving average base, traders often calculate strength of trend and fluctuations that govern it. Shown as a single line, average directional movement index forex provides information about phases of the trend. Calculating the ADX requires knowledge on the statistical tools that help in determining it.
Strength of trend is calculated on a scale of 0 to 100 where higher values indicate stronger tends. Unlike ADR, time period is the sole parameter for directional average. It works pretty much on the same principle as moving average. Thus more the number of periods, more the smoothening and hence more precise is this trend.
How do traders calculate ADX? – Components of Average directional movement Forex:
Termed as a momentum indicator, average directional movement index forex determines the respective strength of buying or selling signals. Imagine a situation in which a particular currency pair is extremely correlated. Additionally, certain factors like change in a socio-political situation or improvement in terms of trade led to a benefit-able situation for that pair.
In this situation, experts suggest using ADX to know range expansion over a certain period of time. There are two components of average directional movement index forex, +DI and –DI. Positive directional indicator denotes that position when high of a certain period is greater than that of its earlier period.
Similarly, the negative directional indicator shows the position when the low of a certain date is lower than its previous low. If one devours the other, traders do not consider taking it into account. Remember that +DI and –DI determine direction of the trend apart from the strength that ADX explains.
By taking absolute difference between these two, traders calculate average directional movement average forex or Directional index. It value is always positive despite the direction.
How can average directional movement index forex help in determining the relative strength of a trend?
Moving average is useful to determine the trend of a trending market, which is another way to say that it determines rate of trend. So for pairs of currency which are already trending, generating buy/sell signals can be initiated by using ADX.
Unlike day traders, traders who pick certain points to trade with, i.e. scalping can use the trend to analyses which way prices are increasing. This may aid in gaining huge profits if they can correctly predict the trend.
When +DI exceeds –DI and average directional index forex has a value of more than 20, traders can take that as a buying signal. In the same way if it falls below 30, it means it’s time to leave the trade.
As a thumb rule, veterans recommend using the average directional movement index forex when you can predict the trend beforehand. In other words, if a certain currency pair is moving against each other, then it becomes easy to depict this using +DI and –DI and determining average of the two. Choose appropriate stops whenever you think that a price reversal is possible and protect yourself.