How to use Average Directional Index (ADX) Indicator Trading Strategies on Olymp Trade

Technical Indicator Average Directional Index (ADX)

The technical indicator ADX (Average Directional Index) determines the presence of a price trend, and also shows the strength of the trend.

The indicator was developed and described by J. Welles Wilder in the book “New concepts in technical trading systems” in 1978 and by the recognition of the author himself is his favorite invention. The indicator was created to identify a long-term market trend and determine its strength for trading in the stock market and a day time frame.

Visually the indicator is two opposite lines +/- DI and the curve ADX:
In general, the indicator can be attributed to the class of oscillators. It ranges from 0 to 100. The value below 20 indicates that the trend is weak, and the indicator of the Average Directional Index in the range from 20 to 40 is that the trend is strong. Values ​​from 40 to 60 indicate a very powerful trend, more than 60 ADX is extremely rare. Average Directional Index does not determine the direction of the trend, but measures only its strength.

If there is any trend in the market – bullish or bearish – the distance between the DI signal lines starts to increase and ADX starts to grow and, conversely, when the activity on the market decreases – the distance between the DI signal lines starts to decline and the ADX drops.

Structure of the ADX indicator at Olymp Trade

The structure of ADX is quite simple which includes the following components:

The ADX line (yellow) is calculated for 14 days and is valid from 0 to 100. This line can be used to measure the strength of current trends.

Next is DMI (Directional Movement Index) with two lines +DI (green) and -DI (red) to help identify buy and sell signals.

How to identify a trend with ADX at Olymp Trade

– Bullish trend when: The ADX line (yellow) goes beyond 25. Meanwhile, +DI is above -DI (the green line is above the red line).

– Bearish trend when: The ADX line (yellow) goes beyond 25. At the same time, -DI will be above +DI (the red line is above the green line).

– Sideways market when: The ADX line is below 25. At that time, the +DI and -DI lines interweave confusingly.

How to trade on Olymp Trade using ADX

To get good orders with the ADX indicator, you need to combine it with resistance/support levels.

Notes: Since we are trend trading, I will use the 5-minute Japanese candlestick chart. However, the minimum expiration time will be 15 minutes to eliminate signal interference in the short term. From there, I increase the probability of winning an order to the highest possible level.

Open an UP order when: ADX signals an uptrend and the price is above the resistance.

Specifically: The ADX line (yellow) goes above 25 and +DI (green) is above –DI (red). At the same time, the price breaks out of the resistance zone and increases further.

Open a DOWN order when: the ADX indicator provides bearish signals and the price penetrates the support zone.

Specifically: The ADX line (yellow) goes above 25 and –DI (red) is above +DI (green). At the same time, the price penetrates the support zone and falls further.

Trading orders at Olymp Trade with the ADX indicator

Currency pairs: EUR/USD

Capital management: Balanced investment of $200 for each order

The expiration time: At least 15 minutes.

At EUR/USD on January 27, a Morning Star candlestick pattern appeared. This was a sign of a trend reversal from bearish to bullish. At this time, ADX provided the signal that an uptrend was about to appear (the +DI line was pointing up and above the -DI line).

1st order: The uptrend was clear by using the ADX technical indicator. The entry signal was a bullish candle that broke out of the resistance zone. Opened an UP order with an expiration time of 15 minutes. I won and received a profit of 82%.

2nd order: The uptrend was still going on stably. A strong Marubozu candlestick that broke out of the resistance zone and closed at the upper was a signal to safely open an UP order. Opened an UP order when the signal candle broke out of the resistance.

As mentioned above, the win rate will be very high using this trading strategy. Therefore, when the trend begins to weaken, it’s time to stay out. That’s why I only opened 2 orders in an uptrend.

Conclusion

In the article, I have provided you with a great money-making strategy in Olymp Trade. Don’t sit back and read this article over and over again as it doesn’t make you any money. Take action by experiencing it on a real money trading account with a small investment.

If you are still not confident, sign up for a Demo account right below to test this indicator. They will help you gain more experience and skills to get the most accurate trades.