The ADX indicator is one of the most popular indicators in trading but is less used than other indicators such as MACD, RSI, Stochastic, ... However, ADX is an indicator that is used by experienced traders. used and mainly in stock trading.

The ADX is an indicator used to measure the strength of a trend. Remember that this indicator is only a measure of strength, not trend identification.

During a strong bullish or bearish trend, the ADX will rise, indicating the strength of the trend. ADX will drop again when the trend weakens. It can be said that the ADX shows convergence at the onset of a strong uptrend and will show divergence when the uptrend weakens. On the contrary, ADX will show divergence with a strong downtrend and converge at the end of a downtrend.

The ADX indicator levels show the strength of the trend. Thus, traders can completely use the ADX indicator to determine the time to enter a trade when the trend is strong and exit when the trend weakens.

To filter the strength and weakness of the trend, we will look at ADX levels with 25 as the benchmark. If ADX rises above 25, for an uptrend we look for a buy signal and in a downtrend, we look for a sell signal.

The ADX level information provides:

As you can see, below 25 represents a weak trend, above 25 is strong and above 50 is very strong.

Chart setup:
  • Timeframe: From H4 and above
  • ADX: cycle 14
  • Additional technical indicator: Stochastic
  • Also, we need to incorporate more identification of support resistance
Now we go into the rules of the transaction.

Entry conditions:
The market must be trending and start trading when the ADX goes above 25. If the ADX is rising above 25 and the trend is clear then we should look for signals based on the stochastic confirmation. .

As shown in the chart below:

ADX can be seen rising above 25. Price also moved above the nearest resistance then retested it as a support zone. The price also reached the uptrend line (seen as support). Stochastic is below 20. This is a good time for us to enter the trade when everything is qualified. At this point, you can open a trade at the market price, or wait for the stochastic to turn up to 20 and enter a buy order. Or you can wait for a reversal candlestick pattern to appear and trade there.

Exit method:

You can use one of the exit methods below:

1. Follow the trend

Stop-loss follows the trend until the price breaks it. It is possible to move the stop loss to the bottom or support resistance.

2. Use stochastic to exit and rejoin when there is a signal

As in the above example, we exit the first buy order when the stochastic cuts below the 50 line. Re-enter the buy order when the stochastic starts going up or down again at 20. We repeat that until the end of the trend...

End of trend

The ADX can play an important role in identifying a trend change or end. If the ADX starts to decline sharply before the price breaks the trend line, As shown below: