The ADX wilder indicator is a unique type of tool that shows the strength of market trends.
However, to improve flexibility a few indicators can be added to create a better system.
These indicators are namely; the plus direction (D+), and the minus direction (D-) indicators.
To boot, the ADX is an oscillator that functions as a trend indicator. It is widely referred to as a non-directional indicator.
This is because the ADX merely shows the strengths of trends and not the direction of these trends.
Moreover, this flaw of the ADX is covered by the D+ and D-. The plus direction indicator being above the minus direction denotes momentum is towards the upside.
When the minus direction indicator is above the plus direction indicator, momentum is to the downside.
How To Calculate The ADX Indicator
The ADX indicator is calculated based on a moving average of price range expansion over a certain period of time. It compares the highs and lows of bars and does not use the close of the bar.
Usually, the default setting is 14 bars, this can be easily edited on every trading platform.
How To Read The Values of The ADX
The ADX is an oscillating indicator, just like its counterparts, it plots values ranging from 1 to 100. With these values, a ranging and trending market can be set apart. Also, an approximate strength of these trends is shown.
Ideally, ADX readings above 25 indicate a strong trend. Conversely, when ADX is below 25, the market is either accumulating or distributing so trades are avoided.
A complete breakdown of the ADX indicator’s readings is shown in the table that follows:
|ADX Value||Trend Strength|
|0-25||No trend/ Weak Trend|
|50-75||Very Strong Trend|
|75-100||Extremely Strong Trend|
Trend strength is increasing when the ADX line is rising, the price moves in the direction of the trend. When the line is falling, the trend strength is decreasing, the price enters a period of retracement.
How To Use The ADX Wilder With The DMI
The ADX does not indicate whether the market is bullish or bearish. Rather, it is used to filter out ranging markets from trends.
Generally, strong trends have a high reading. The stronger the trend, the higher the reading of the ADX indicator.
When the reading of the ADX is low, the market is ranging or consolidating. Therefore, market orders are not placed here.
From the table above, an ADX reading between 25 and 50 shows a trend present. While the ADX is in the region and the plus direction indicator is above the minus direction, it is an uptrend.
Contrarily, if the minus direction indicator is above the plus direction indicator when the ADX is above 25 it is a downtrend.
How To Trade With The ADX Wilder (DMI)
There are two major ways in which the forex market can be traded with this indicator. Both of these ways will be discussed in this section.
When the plus direction line (DI+) crosses above the minus direction line (DI-), it is a bullish signal.
Furthermore, It shows that an uptrend is imminent, a buy order is then placed with a stop loss below a significant structure. This structure could be the previous day’s low, a recent swing low, etc.
Conversely, when the minus line (DI-) crosses above the plus direction line (DI+), a downtrend might start soon.
As a forex trader, the next train of thought would be to place a sell order. In this case, the stop loss would be placed above major structure points (previous highs).
In the example above, a bullish crossover occurred. Hence, a strong bullish move followed.
DI Contractions and Expansions
The bands of the Bollinger tend to contrast and expand relative to volatility. The DMIs also exhibit this behaviour.
The plus and negative lines moving away from each other signal an increase in volatility. Scalp traders take advantage of reactivity to make quick profits.
Swing traders, on the other hand, stack a bunch of orders when the lines contrast in an anticipation of a breakout.
In the chart below, contraction occurred, therefore, a volatile move upwards followed.
Note: In both scenarios above, it is necessary that ADX is above 25 to prevent false signals.
The ADX is a trend indicator although it is non-directional. It is non-directional because it merely shows the strengths of trends and not the direction of these trends.
Also, The ADX (average directional index) indicator is a type of oscillator. Just like other oscillators, its readings are graphed on a scale of 1-100.
The ADX indicator is an amazing tool. Trading in the direction of the trend increases returns while reducing risks. As a beginner, it can be quite difficult to recognize trends correctly.
Moreover, adopting the ADX indicator helps find strong market trends and teaches discipline.
Although the ADX is non-directional so it has to be paired with another indicator that specifies the market’s direction.
Summary; A Detailed Insight on The ADX Wilder (DMI) Indicator
Quite frankly, the ADX and DMI system is very flawed. Firstly, the indicator as a whole displays past data so it lags.
Sometimes, trend changes have happened way before it is signalled. Other times, the price does not move in the direction the crossover indicates leaving you liable to false signals.
Additionally, ADX might climb above 25 indicating the start of a new trend but it fazes out.
To sum up, traders should not use the ADX wilder indicator alone. Other technical indicators should be used alongside it.