ADX staying below 20 level — there is no trend or the trend is weak. ADX moving above 20 level — forex trend following filter is strong. ADX passing 40 level — trend is extreme.
ADX value rising — trend is going stronger, falling — trend is weakening. DI stays on top of -DI — uptrend is in place. DI — downtrend is in place. Two DI cross — trend is changing. ADX advices on the strength of the dominant forces that move market prices here and now. In other words, ADX advices on trend tendencies: whether the trend is going to continue and strengthen or it is about to lose its positions.
The author of Average Directional Index J. ADX are not an easy to take a grasp of from the first look, many Forex traders avoid using ADX in favor of more visually comprehensive indicators. Traders then need to draw a horizontal line at the level of 20. All readings of ADX which are below 20 suggest a weak and unclear trend, while readings above 20 indicate that a trend has picked up.
That is, basically, the simplest explanation of the purpose of ADX. ADX allows Forex traders to determine whether the trend is strong or weak and thus choose and appropriate strategy to trade with: a trend following strategy or a strategy fit to consolidation market periods with no significant price changes. There is also additional line to be added to ADX indicator window – at 40 level. If ADX is traded below 20 – there is no trend or the trend is weak, thus a non-trend-following strategies should be used, otherwise losses may occur as a result of false signals and whip-saws taking place. An example of non-trend-following method is channel trading. If ADX is traded above 20 but below 40, it is time to apply trend following methods. An example would be: Forex trading Moving averages or or trading with Parabolic SAR indicator.
Stop loss order to a break even. When ADX passes 40 level, it is a good time to begin collecting profits gradually scaling out of the trades on rallies and sell-offs and protecting remaining positions with trailing stops. DI lines are used for spotting entry signals. DI crossovers are disregarded while ADX remains below 20. If after a newly created signal another opposite crossover happens within a short period of time, the original signal should be disregarded and position protected soon or closed. ADX indicator is never traded alone, but rather in combination with other indicators and tools.