ADX indicator (Average Directional Index) turns out to be another good tool for a trader and belongs to the category of trend indicators. Therefore, a trader can use this indicator in order to determine, whether there is or not a trend in the market currently.
ADX indicator: general concept
This indicator was invented by the famous stock trader and analyst Welles, who has described this tool in one of his books. This indicator is based on two tools: Plus directional indicator (+DI) and Minus directional indicator (-DI). The first one shows the strength of the ascending movement and the second one shows the strength of the descending movement
As for the Average directional movement index itself, it turns out to the smoothing line which has incorporated both indicators. Thus, the ADX indicator can both show signals for the Call options and generate signals for the Put contracts. But this is not the top priority of this binary options’ indicator because its major goal is to show a trader the presence of a trend, as well as to show the presence of the sideways movement in the market in the certain situations.
ADXindicator has several variants of how signals appear. For example, if the indicator’s line is located lower than the level of 20, then there is no trend in the market. The appearance of the new trend can be observed, when the indicator’s lines cross higher than the 20 level. In addition, if there is the growth of the ADX line in bounds between 20 and 40 levels, it may show that the new trend is arising in the market.
All signals that appear higher than the level 40 show that there is a very strong trend in the market. At the same time, the reverse of the main movement can occur at the nearest time, depending up the direction of a trend. If the ADX line crosses levels 50 and 70 (the last mentioned case occurs very rarely), a very strong movement in the single direction occurs in the market.
ADX indicator: how to trade
It is natural that this indicator’s main benefit for a trader consists in a fact that it sends the certain trading signals, and a speculator can use these signals to buy binary options for the certain underlying asset. Let’s consider variations for the purchase of the Put and the Call options.
In the situation when the +DI line crosses the –DI line from down to up, the signal to buy the Put option appears. In general, even if a trader uses only this single signal, he will be able to find fairly good entries into the market.
And if the –DI line crosses the +DI line, the signal to buy the Put option will appear. As in the first case, this signal is strong enough for work. But the peculiarity of the ADX indicator consists in a fact that the ADX line points on the trend’s strength. This exact trend line has to be taken into account as the signal one when making a decision. For example, if the +DI and –DI show the signal to buy the Call option, it is needed to pay attention to the ADX. If it is growing at this time and has exceeded the level of 20, then there is the greater probability of the strong trend. Therefore, a signal is supported by the additional confirmation.