\n\tThe ADX<\/span> is used to qualify and quantify trend strength. The approach and display is very simple. The ADX<\/span> filter can have very beneficial effects on your trading results.<\/p>\n \n\tThe indicator measures only strength but not directional bias. This allows the trader to choose the strongest trends to enter and let profits run when the trend is strong as per the ADX<\/span>.<\/p>\n \n\t \n\tThe GBPJPY shows an uptrend on the chart with multiple entries as the ADX indicator on the bottom shows a majority of readings above the strong trend level. The red line was added as a reference point of when the indicator shows a strong trend.<\/p>\n \n\tTo filter the trend strength, we recommend looking for trend entries only when the ADX is above 25.<\/p>\n \n\t \n\tADX Rule:<\/strong> When trading trends, the ADX rises when the trend is strong. When the trend is weak, ADX drops. This table will guide you through translating ADX values to trend strength.<\/p>\n \n\tADX is not a directional indicator, only a Trend Strength identifier. Much like the RPM on a car doesn’t tell you the speed, only the force. ADX is the same behind the trend.<\/p>\n \n\tFor directional bias, we recommend combining indicators to find pullbacks in the direction of the overall trend or breakouts with the ADX. This will combine higher probability set ups with a strengthening trend.<\/p>\n \n\tEntering Strong Trends<\/strong><\/p>\n \n\tRule one for a lot of traders is that you can control the risk but not the market. Another rule is to only enter the higher probability set ups that match your trading profile. Using the ADX allows you to filter a current potential trade to see if the entry is worth the risk.<\/p>\n \n\tADX is the filter we will use to determine whether a down move is worth entering on a sell trade. ADX will also be used in the same manner to grasp if an up move is worth entering on a buy trade. Either way the ADX will break through 25 to tell us that a strong trend is in play.<\/p>\n \n\t \n\tThis current USDCAD set up shows us the beginnings of another potential strong down move.<\/p>\n \n\tHere are the tools at use on the chart above:<\/p>\n \n\t-ADX for filtering Trend Strength \n\tFirst and foremost, we will keep our eye on the ADX to push through 25. When the ADX breaks through 25, we have the indicator’s invitation to enter in the direction of the overall trend. The USDCAD overall trend on the daily chart is downward.<\/p>\n \n\tBecause the ADX isn’t there yet, we’ll wait for the set up to develop.<\/p>\n \n\tFibonacci retracements are a popular tool to identify potential levels with horizontal lines to indicate counter move exhaustion. In other words, support in a downtrend is potentially at one of these levels and when price bounces off these levels we can look to enter off that resistance point in a downtrend.<\/p>\n \n\tA favorite of many traders is the 50% level of any move. This 50% principle states that if a move, after all its variations in price, can hold the halfway level, there’s a good chance the overall trend will prevail. If the market cannot hold 50% of its move, then it may break down and reverse the overall trend.<\/p>\n \n\tWe can see above that the market held the 50% level and is looking to move back down. If the ADX breaks through we have another confirmation.<\/p>\n \n\tThe last indicator we will use is the slow stochastic oscillator (SSD). This momentum indicator compares a currencies closing price to its price range over a given time period in a range of 0-100. The 80 level shows an overbought reading and the 20 level shows an oversold reading. You can adjust the time period of the indicator to reduce the stochastic’s sensitivity to market movements.<\/p>\n \n\tDuring a downtrend, prices tend to close near their lows. Slow stochastic signals occur in a downtrend when the indicator turns down below 80 after a temporary upswing in the market. This shows higher probability entries.<\/p>\n \n\tThese two indicators were added to the ADX to show you the flexibility allowed to the trader with this indicator. In the end, the ADX quantifies trend strength so you know if this is a trade worth entering based on your money management rules.<\/p>\n \n\tThe ADX allows you to combine the indicators you are already comfortable with to ensure you’re only trading the strongest trends. This can keep you out of choppy markets when your objective is letting your profits run on a trend.<\/p>\n \n\tHappy Trading.<\/p>\n \n\t—Written by Tyler Yell, Trading Instructor<\/p>\n \tThe views expressed are not FNArena's (see our disclaimer).<\/p>\n \n\tFor real time news and analysis, please visit http:\/\/www.dailyfx.com\/real_time_news<\/p>\n \n\tDailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.<\/p>\n \n\twww.dailyfx.com<\/p>\n \n\tDisclaimer<\/strong><\/em><\/p>\n \n\tForex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.<\/u><\/em><\/p>\n \n\tTrading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM<\/span><\/span> Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.<\/em><\/p>\n \n\tFXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”<\/em><\/p>\n \n\tTechnical limitations<\/strong><\/p>\n \n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise, but technical limitations are to blame.<\/strong><\/p>\n![\"\"](\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/dailyfx27-11a.jpg\")
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\n\t-Fibonacci Retracement for support in a downtrend
\n\t-Stochastic for price turning back down from overbought levels<\/p>\n