Dec 032011
 

You see that the EUR/USD was moving up strongly, so you bought this pair on the last pullback. But now after another move up, the pair has pulled off of the highs and is moving down and you wonder if there is a way to measure the strength of the move so you could have exited earlier to protect more of your profits. There is and it is called the Average Directional Index (ADX). Developed by J. Welles Wilder, the ADX is meant to evaluate the strength of a current trend, be it up or down. The important point is that this technical indicator will not give you the direction of the trending move, but rather will tell you if that move is gaining or losing strength. A simple look at the ADX plotted on a daily chart of the EUR/USD shows the value of this tool. We can see that the market was moving up strongly as the ADX was moving up. I have drawn lines on the chart with an arrow showing where the ADX peaked and started to move down. We can also see that this change in trend of the ADX was also a change in the direction of the EUR/USD. If the market was in a downtrend, the ADX would also rise as the market was selling off and peak as the market started to change direction back to the upside. But the key is to remember that this indicator only measures the strength of the trend and does not tell us the direction of that move. As a trend trader, this change in momentum can be a valuable tool to help you determine the end of a strong move. If trading with the trend, a trader using the ADX on EUR/USD trades would exit as the ADX peaked and started to move down. This way the trader would be able to better time their exit and keep more of the profits in the trade.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

 Leave a Reply

(required)

(required)

Time limit is exhausted. Please reload the CAPTCHA.