The forex market remains the largest financial market where traders’ participants buy and sell currency. Investors trade these currencies based on the fluctuation take place in the market. The market operates 24 hours a day across different time zones with traders having various techniques to trade the market.
However, the trend is your friend is a famous statement all traders agree to – notwithstanding their strategy. In this article, you will learn about the ADX indicator MT4, which many traders use to determine the trend of the market.
The market tends to behave in a particular way under certain situations. It tends to repeat this behavior such that traders can predict the price pattern of the market. To do this, most traders utilize forex indicators, which recognize such patterns once they begin to form. However, getting access to such indicator and using them rightly are two different things. At such, some traders are hapless such that disregard the use of indicators.
Nevertheless, indicators are powerful tools that work depending on how you use them. Importantly, with time and experience, you can understand the tricks in every indicator. For instance, the ADX indicator MT4 is a trend indicator that can identify the strength of a trend. A new trader who doesn’t know how to use it can conclude that it doesn’t work.
Trend – How to identify it
One simple means of progressing as a new trader is to identify a trend. The difference between a successful trader and a failure is their ability to identify a trend and trade it efficiently. For most beginners, it is the hardest thing even though it is diametric to what they believe. The simplest means of identifying a trend is by looking at the raw price action of a currency pair.
Technical traders or price action traders believe all information needed to make a decision on the market is shown on the candlesticks. Traditionally, we believe that candles help illuminate a dark place – so traders have formed that same perception in trading.
Therefore, the market makes an uptrend or downtrend depending on several factors. The ADX Indicator MT4 is one indicator that helps traders know if the strength of an uptrend or downtrend is weakening or not.
The ADX Indicator
The Average Directional Index or popularly called the ADX indicator is a tool used by technical or price action traders to measure the strength of a trend. Besides this, you can use it as a filter, range finder, and measures trend strength. The usage of ADX indicator isn’t limited to forex trading as traders can also use it in mutual funds, futures, exchange-traded funds, and stocks.
The indicator is a product of Wilder’s directional indicators – the negative and positive directional indicators (D- and D+). These two indicators help complement the ADX indicator by offering a guide to the direction of the trend. The directional indicator compares the high and low of the current period against that of the previous period.
How ADX Indicator measures Trend Strength
You can measure the strength of a trend by reading the ADX line. Whenever the ADX values range between 0-25, it indicates a weak or absent trend strength in the market. Values ranging from 25-50 indicate a strong strength.
However, values from 50-75 indicate a very strong trend, whereas 75-100 represent an extremely strong trend. Importantly, the indicator ADX allows you to add these levels on your own.
Using ADX indicator as a range finder
Aside from using ADX indicator MT4 to verify the strength of a currency pair, you can also use it as a range finder. Most times, when prices move from a trending situation, it tends to go into a state of consolidation – range. The ADX indicator enables you to know when the market is ranging pending when the market changes direction again.
Most traders use the ADX indicator as part of their strategy because it allows them to know when the making is trending or not before choosing when to enter the market. When the market is ranging, the trend strategy that involves the ADX indicator won’t be appropriate except when the market is trending.
If you consider using the indicator ADX in a trending market, it should be when the market is on pullbacks and in the direction of the trend. Furthermore, you can enter trades when there is reversal at support and resistance levels.
How trend forms
For a trader, knowing how to identify a trend and trading it properly is priceless but knowing what creates and sustain it is crucial. An important factor that influences a trend is fundamental factors of the financial instrument. An example of fundamental factors includes employment, interest rates, and other economic factors. If the currency experience weakness or strength, it affects such pairs negatively or positively.
Technicians can create and sustain a trend. The collective actions of these technical traders define areas of support and resistance. For example, if price breaks in a downtrend below a defined support level, traders will likely enter the market. This will fuel demand in the market, which will further propel the downward trend.
Besides these, human emotions or sentiments can sustain the trend in the market. For instance, confidence, greed, and fear are vital emotions that affect the activities of traders collectively. Peradventure traders are fearful; there will be a negative impact on the market. Alternatively, if traders are confident about the market, there will be a positive sentiment or feel, which will fuel an uptrend.
Conclusion for ADX Indicator MT4
The trend is indeed your friend when you know the direction of the current trend. Using ADX indicator MT4 can help determine the current strength of a trend. Importantly, never allow a trend to catch you off-guard; you have to be alert at all time.
While the ADX indicator remains an asset, you must not depend on it entirely. You need other indicators and tools to help you while trading.
However, we have the best forex indicators and tools to make trading easy. You can take advantage of our numerous trading tools through this link to get better trading results.