When you’re trading Forex markets, depending on your trading system, you might have to be able to track strength and weakness situations. The ADX, Average Directional Index, is a great indicator for tracking that strength and weakness on one chart.

Here is a video on ADX Moves in a forex market…

When the market you’re watching is moving higher, and the ADX is rising to the upward motion, that upward motion is strong. If the ADX is falling, then that upward motion is weak.

When the market you’re watching is moving lower, and the ADX is rising to the downward motion, that downward motion is strong. If the ADX is falling, then that downward motion is weak.

You’ll see on the next video how to use the ADX to track trend direction on a chart.

If you have any questions or comments, please leave them. I’ll answer or respond as quickly as I can.

Have a fantastic trading day!

Things are crazy here, so I won’t be making a forex training video tonight. Instead, here’s some great, useful information for if you use the ADX (Average Directional Index).

ADX Basics: Definitions of move and trend, and the 4 Main ADX Principles

In the ADX we can see that we have varying degrees of strength and weakness. Those varying degrees are given below, and are important later on because when certain conditions are not met, we KNOW what has to happen. Every single time, but not always to a new extreme.

Definition of move on the ADX:

When the market makes a move and the ADX changes direction. (i.e. from moving up to now moving down, or from moving down to now moving up. A flat ADX is not a change in direction.)

1. When the market makes a move and the ADX increases, that move is a strong move on that chart at that time.

2. When the market makes a move and the ADX decreases, that move is a weak move on that chart at that time.

Definition of trend on the ADX:

After a strong move (as above, or trend of any kind) the market moves in the other direction and the ADX decreases, THEN the market moves farther in the direction of the previously strong move (or trend of any kind), we now have a trend on that chart at that time.

3. In a trend, when the ADX moves higher than it was at its previous high peak, we have a strong trend on that chart at that time.

4. In a trend, when the ADX is not now higher than it was at its previous high peak, we have a weak trend on that chart at that time.

The idea behind the definition of trend…

Is that we have strength in any form (a weak trend is still stronger than a weak move), then the ADX decreases, and after that decrease, the market then moves farther than it did before in the previous direction of strength. [Please note in the above that we have moves and trends. Also note that we have strong move, weak move, strong trend, weak trend.]

Definition: End of a Trend

A trend is over on that chart when the ADX tracks strength in the direction opposite the trend. Once the ADX says a trend is over on that chart, more strength on that chart in the same direction is now a move until the conditions are again met for it to be a trend on that chart at that time.

If the ADX does not fall between moves in the market, and still tracks strength in a direction then keeps moving in that direction, it is still a move.

The ADX must fall, even just a little bit, before again moving up as the market moves farther that it previously did in order to have a trend. Once the market moves farther, we have either a strong trend or a weak trend.

In sequence from weakest to strongest: weak move, strong move, weak trend, strong trend. In defining trend, anything other than a weak or very weak move counts as previous strength.

Only compare ADX peaks that are tracking the same direction of movement or trend strength.

ADX Principles Shown on a Chart

Let us take a look at the ADX (black line indicator below) regarding strong and weak moves:

It is possible to have a move be weak, then turn strong. It is possible to have a move be strong then turn weak. It is possible to have a weak trend turn to a strong trend. It is possible to have a strong trend turn to a weak trend, or even a weak move. See the coming video(s) on the ADX for more explanation.

If you have any questions or comments, please leave them. I’ll get back to answer them asap. Since part of my goal here is for you to understand what I’m teaching here, if there is anything you don’t “get”, just ask.

Have a truly phenomenal trading day (and weekend!) P)

Before the Forex markets opened up today, I did a quick (and incomplete) run-through of more indicators than just the MACD. Included was also the ADX (Average Directional Index) and the ATR (Average True Range) and they were sort of covered a little quickly and with some wave stuff in there, too. Here’s the video (it’s about 9 minutes 29 seconds)…

So some quick stuff that was gone over in the video, however incomplete it is in the vid…

I’m changing gears here on this training. The Forex Challenge on Facebook, which ends October 31, 2008 for this match, and me being challenged, and starting off over $85K behind the leader, calls for a time efficiency step. Hence, this change.

What I’ll be doing is going over charts at least 3X per week for you. Maybe not in the same currency pair, but with the same indicators: MACD, ADX and ATR.

The MACD is there for spotting divergence patterns. The ADX is another strength/weakness tool, though not used like the MACD because it’s not an oscillating indicator. The ATR, which I’ll have to cover separately down the line, is not used at all in reading the charts, but for trade sizing.

The odd thing is here I won’t be using much trade sizing until I overtake the leader, assuming that I can.

ADX Basics

The Average Directional Index, ADX, shows strength in a move or trend, or weakness in the move or trend. When the market makes a move and the ADX decreases, that’s a weak move in that market on that chart.

When the market makes a move and ADX increases, that’s a strong move in that market on that chart. It’s a sign of strength on that chart only, and is basically useless unless accompanied by other signals.

It gets better later down the line, but really start understanding that little bit now. Ask your questions and I’ll answer those questions, or respond to comments, as I can.

ATR Basics

The Average True Range, or ATR, is only used by me to determine trade size. In other words, I divide my account, under actual trading circumstances with real money, into “units”. The “unit” represents, say, 1% of my trading account.

In the EUR/USD or the GBP/USD one pip is $10, so that makes it pretty easy. The ATR acts as a “volatility normalization” tool. The more volatile a market is, or the bigger the chart is, the higher the ATR will be. The smaller the volatility in the market, or the smaller the chart, the lower will be the ATR, developed by Wells Wilder, by the way.

So I basically divide my max risk for the trade by 10 and that gives me how many pips I can risk. I MUST risk that number of pips or less to be able to enter. There’s a lot more to it, but that’s the basics.

AND of course, the MACD (and histogram) give me divergence patterns that I want to see so I know the market is talking to me.

In Summary…

So, quickly here, we have the GBP/USD appearing before the markets opened for the night (yes, this is Sunday) as if there was still strength in upward moves. While there was one divergence pattern saying the market could come down, that one pattern was poisoned by a very strong ADX (the double-high, to be covered another time) in the wrong place.

A little bit was covered on the waves, but those will really have to be covered over the course of a week or two down the road. The ATR did not show that the market wanted to relax much because the volatility was decreasing, rather than increasing on the chart discussed. And I’ve got to get this posted…

If you have any questions or comments or criticisms, I’m open. I’ll answer, respond, or belittle you as required. LOL

And don’t try using this stuff in your own forex trading until you have successfully managed a paper trading account with it over sufficient time to know if you CAN use it profitably. Got it? If you try, and you have not successfully managed your own paper trading account with the info on this site, guess what? Yep, I guarantee that you will lose money. (Okay, I could make that guarantee and be right for like 97% of Forex traders, right?)

Anyway, have a phenomenally fantastic week in trading. More tomorrow! See you then.