Forex ADX Indicator Explained

Riding the trend is one of the most profitable trading strategies you can have as it is a good way of producing high risk reward ratio trade and the best way to find out the status of the trend is to make use of the forex adx indicator. So Why ADX Indicator? If you have been reading my blog, you will know that I have written an article to help you identify the trend of the market using various forex trend indicators like the moving averages. The moving averages are still a good way to tell the trend but they are unable to give you a value for the trend and this is where the ADX indicator comes into play. What Is ADX Indicator? It is an indicator that is made up of a single line with value ranging from 0 to 100. You may think that it looks like an oscillator but it is uni-directional. Unlike the oscillator which tells you that the market is moving up when it is pointing up and the market is moving down when it is pointing down, the ADX is only meaningful when it is pointing up and that’s why it is uni-directional. If you take a close look at the picture below, you will find that the adx will point up when you are in a good uptrend as well as a downtrend. How to Use the ADX Indicator? I personally use it to tell whether the market is trending or ranging. As stated in the earlier part of this post, the ADX has a range value from 0 to 100. When it is moving below the 25 level, it is telling you that the strength of the market is very weak. What usually happens at this time is that the market is in consolidation and will most probably be moving in a range. When the indicator moves above the 25 level, it is telling you that the trend is strengthening and the larger the value, the stronger will be the trend. However to have a better understanding of the trend you are in, you need to combine the direction of the indicator together with its value. Sign of a Strong Trend: You are in a strong uptrend or downtrend when the ADX indicator is pointing up and moving above the 25 level.

Strong Uptrend

Strong Downtrend Sign of a Weak Trend: You are not in a strong trend when the indicator is pointing down and moving below the 25 level.

Weak Trend Other Uses of ADX Indicator 1) Divergence: Besides using the ADX indicator for telling the strength of the trend, you can also use the divergence of this indicator to warn you of possible retracement or reversal. If you have entered a LONG trade and you see the ADX making lower highs while the price make higher highs, this is a good time to exit your trade as a retracement or a reversal is going to occur.

ADX Divergence 2) Breakout Strength: You can also make use of this indicator to help you trade breakouts. The problem with most breakout traders is fake out which is the false movement of the market leading most inexperienced traders to enter a trade and then stopped them out by reversing the movement.

Validating Breakout With the ADX indicator, you will now be able to check if a breakout is valid or not. When you see the price breaking out of a pattern or trend line, you can immediately check your indicator to see if it is pointing up and moving above the 25 level. A valid breakout will be formed when the ADX indicator is pointing up and moving above the 25 level and an invalid breakout will be the opposite. I hope that you find this indicator useful for your trade and eventually integrate it into your trading plan. If you have other uses for the ADX, do share with us by commenting below. I hope that this blog will eventually become the place where traders share their knowledge and everyone can learn from one another.

Forex Stochastic Indicator Explained

The stochastic indicator is a tool that is developed by George C.Lane. It is in fact a momentum indicator or oscillator that is used to compare the current market price to the high and low of a specific period of time. The stochastic is made up of 2 lines, %K and %D. Depending on your setting, you can adjust the sensitivity of these 2 lines to suit your plan. Although there are 3 types of stochastic namely full, fast and slow, the fast and slow ones are more commonly used. So let us take a look at both of them.

Fast Vs Slow From the picture above, you can see that there are more crossovers for the fast stochastic which means that it is actually more sensitive than the slower one. However this gives rise to more false signal which is undesirable in trading. As for the slow stochastic, it is less sensitive and produces lesser false signals as compared to the fast one. Due to its low sensitivity, it will usually signal you to enter a trade after the market has already moved by certain amount. How to Read the Stochastic? When the stochastic moves above the 80 level, the market is considered to be overbought and when it moves below the 20 level, the market is considered to be oversold. However there is one thing you have to take note, when it moves above the 80 level, it does not always mean that the market will reverse. There are times where it will continue to stay above the 80 level and in this situation; it usually indicates that the market is in a strong uptrend.

overbought and oversold The important thing to note when reading the stochastic is when the %K crosses above %D after it reaches the oversold level or when the %K crosses below %D after it reaches the overbought level. How to Use the Stochastic? There are several ways you can use the stochastic to help you in your trading and below are some of them 1) Entry Signal: It can be a great tool when it comes to giving entry signal. Personally I like to enter my position when the %K crosses the %D and move out of either the overbought or oversold level. If I am looking to go LONG, I will wait for the stochastic %K to cross above the %D and move above the 20 mark. If I am looking for a SHORT trade, I will wait for the %K to cross below the %D and move below the 80 mark. 2) Exit Signal: The concept for using stochastic to exit my position is about the same as the entry. If I have taken a LONG trade, I will wait for it to move to the overbought zone and exit my position after %K crosses below %D and move below the 80 mark.

Exit Signal 3) Reversal Signal: Other than MACD divergence, you can also make use of stochastic divergence to enter a trade. The positive divergence occurs when the market makes lower low while the stochastic make higher low. This is usually an indication that the market is going to reverse up.

Positive Divergence The negative divergence occurs when the market makes higher high and the stochastic make lower high. This usually signifies a downward reversal is going to occur.

Negative Divergence The above are 3 ways I usually use the stochastic and I hope that you will be able to make full use of its ability to help you in your trading.