Hello.
Could someone please explain or point me to a good resource for an explanation and interpretation of the ADX indicator?
Thanks
If you aspire to trade the ADX, you need the book ADXcellence by Charles Schaap. It would take you years to discover all the techniques in this book, if you ever did. I have tried about everything over the last few years, and I now use this system exclusively, although I also put the Ichimoku on the the price graph as a general guide–just the cloud, not the other lines. I believe this trend-trading system was developed mainly for use on the higher time frames, but I have come to use it on one-minutes bars of EUR/USD. I find that this is the only pair liquid enough for me to trade at this time frame. I use MetaTrader for analysis, although I trade on Oanda. Pay close attention to the use of divergence. I like to use a linear regression channel in addition to drawing price patterns. I also use Fibonacci expansions–a Meta
trader tool–to predict the extent of a trend.
I look at about a dozen setups per week, although I may not trade all of them. At this time frame you should not trade anything but the most immaculate setups. Be aware, though, that no system will assure success, particularly on the noisy lower time frames. Trading one-minute bars is more about your own ability than anything else. If you can’t trade pretty well on price alone, no indicator will help you. You’ll need to practice a lot.
At $150 the book is pricey, but one successful trade will pay for it.
What makes you want to use ADX?
ADX isthe best way to measure trend that I have encountered. Basically, when ADX–with the ADX and DMI parameters recommended in ADXcellence–is greater than 25, retracements can be entered. ADX itself is a lagging indicator; you need the companion Directional Movement Indicator to give entry signals. You exit on price, often assisted by divergence.
There is a wealth of information in the ADX/DMI becuase it shows trend strength and momentum, and both bull power and bear power, simultaneously. You don’t need any other indicator; they would just get in the way. Surprisingly, it takes a dense text-and-diagram book of almost 300 pages to describe how to use ADX principles and tactics effectively. There is so much material that you must be intimately familiar with that will find yourself reading the book over again and again and consulting it during your trading. It all has to sink into your bones before you can use it in practical situations. This post probably sounds like a testimonial, but I have no connection to Dr. Schaap.
To answer your question in a nutshell, I like to use ADX because I can make a profit. I just sit at my computer and push buttons, and money magically appears–or sometimes disappears, but not as often–in my account. It’s a lot of work, but it sure beats going to a job. Been there, done that.
Trading the ADX is not for everyone. Trade a demo account for several months before you commit any money, then start slowly in order to master the required mental discipline. To quote an adage from the book, “Poor discipline is knowing what to do and not doing it; knowing what NOT to do, and doing it; or not knowing what to do and doing ANYTHING.” If you try this method, particularly at a lower time frame, and lose your money, no blame me.