When you’re trading Forex, strength and weakness agreements have a tendency to come in handy. One of my favorite indicators for tracking strength and weakness patterns is the ADX. Today, we’ll cover ADX trends and their respective strengths and weaknesses, and an example of ADX weakness in time, on consecutive charts.
That’s some of what’s on today’s video on ADX Trends:
So the first thing you need to have a trend showing on the ADX is for there to be strength showing on a move. If the market moves lower and the ADX increases, that’s a stong move down, and the first step needed to have an ADX trend.
The second component needed is for the market to retrace some of the strong move, and have the ADX decrease, saying that there’s weakness in the counter-strength direction. So if the market moves lower and the ADX increases showing strength, then the market moves higher with the ADX decreasing, that’s the second part of having an ADX trend.
The third and final component is for the market to move farther in the direction of the prior strength.
Then there is an ADX trend on that chart, and that trend is either strong or weak.
In a strong trend, the ADX moves higher than it was at the end of the strong move in the same direction. In a weak trend, the ADX does not move higher than it was at the end of the strong move in the same direction.
Example: The market moves down, the ADX increases - shows strength in moving lower.
The market then moves higher, and the ADX decreases - shows weakness in moving higher.
The market then moves farther down than it was before the retracement up began.
That’s an ADX trend, and it is either strong (if the ADX is also higher than it was as the market moved farther), or weak (if the ADX does not move higher than it was as the market moved farther).
That’s it on the ADX trends. If you have any questions or comments, please leave them and I will get back to you as soon as I can. Have a tremendously successful trading day!
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.
I’ve been watching the EUR/USD and thought there might be a real time example of a bigger chart strength plus the (multiple) smaller chart weakness. Luckily I was right. The video below shows the possible trade as it’s setting up. It’s not a trade - yet, but it’s here now.
If you have any questions, please ask and I’ll answer as quickly as I can. Any comments - great! Tell me what you want to learn about here, and if I can immediately fit it in, I will. If not, I’ll let you know when it will be scheduled.
The point here is that I want to teach you a basic model of trading, something that is simple, so you can practice managing the system quickly. Paper trading the forex markets is good if you treat the “paper trading” as THE time to learn how to manage the trading system that you’re using. More on that another day.
So the basic concept here is that when you have the bigger chart strength divergence (to go down in the video example) combined with multiple smaller chart weakness (the weakness is in moving higher, so the market looks like it wants to move down, lower) is a great place to use the previous peak take out basic trading model.
The two combine beautifully. The purpose of indicators is to increase the probabilities of your basic trading model in your favor. The divergences do that very well in forex markets - especially combined with the previous peak takeout model.
Any questions? Ask. I’ll answer. Stay great and have a truly phenomenal trading day!
Divergences are the “secret fractal” that fractal searchers have been looking for. I’ll explain more about their use in Forex trading in a few moments. A fractal is repeating pattern. That’s the essence. The use of finding a fractal is that fractals allow prediction. Much like calculus allows the prediction of rates of change, and differential equations allow predictions in effects of the differences of rates of change. You don’t have to know calculus or diff-eq to use anything I’ll be writing about - they’re examples.
In case you don’t know what a divergence is in reading charts, I’ll explain that for you. Basically a divergence is a comparison between what the market does and what an oscillating indicator does, and when there is a difference between “point to point” comparative motions. Here’s a sample chart:
Please not that this is for illustration purposes only to show what a divergence is. Notice that we are starting here from a valley on the MACD, and starting on the price bar that is at that valley. (There are definite rules to drawing divergences and they’ll be covered in another post.)
The starting point is always in the past, and we always start in the past and draw our lines toward the present.
Notice that as soon as the market’s price moves below the low of the starting bar, we have a divergence. The entire yellow zone, A, is a divergence zone. In other words, as the market keeps moving lower, the divergence between the market’s price action and the MACD action are not the same. The market moves lower while the MACD does not. That is a “divergence”.
That particular type of divergence, where the market moves farther in a direction while the indicator does not, is often called a “reversal” or “weakness”. I call it “past weakness” when it is accompanied by other price/indicator “divergences” (convergences are also included in the term).
You know what? I’m just going to make a video of the basics of all this for you. I’ll be up just below once I get it made and up (figure about 8 hours, or about 2:00am NYC time - 7:00am London time)
Keep in mind that the info above and in the video are very far from complete. I’ll tell you about the rules for having divergences tomorrow, though it might be late.
By the end of this series of blog posts and lessons in forex trading, you will understand that these divergences are, indeed, the secret fractal - and you might even feel good enough to trade with the info. But that’s up to you.
If you have any questions or comments or additions - PLEASE ask or leave them. Good, bad, doesn’t matter. I want to provide you with what you want to know. I’m not very good at guessing.
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