The adage “the trend is your friend” has a lot of validity in forex and cryptocurrency trading. Trading in the direction of a strong trend reduces risk while increasing possible profit.
The average directional indicator (ADX) was created to assist traders in identifying trending markets and determining trend strength to stay on the safe side. Built in 1978 by brilliant engineer-turned-analyst J. Welles Wilder Jr., this trend indicator has been a fixture in analytical trading methods for over 40 years.
Trace a trend line along the ADX peaks and another along your price peaks when utilizing the ADX as a momentum indicator. Higher ADX peaks imply rising momentum, while smaller ADX peaks indicate decreasing velocity. The two trend lines that arise from opposing trajectories, showing a divergence between the ADX momentum and price.
Combining the ADX with other momentum indicators, such as the stochastic oscillator and relative strength index (RSI), can assist traders in confirming divergences and validating entry and exit signals against overbought and oversold readings for better precision. The moving average convergence divergence can also be used to illustrate trend strength, direction, and momentum (MACD).
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