You can sum up the secret to using ADX indicator in a single word: SLOPE.
Most traders learn that ADX is a robust system that tells you if the market is trending. The typical interpretation is that if ADX is above 25, the market is trending. If ADX is below 25, the market is meandering without direction. (You can also use ADX as a low-risk day trading trigger with the 2-period ADX.)
While the value of ADX is significant, the slope of ADX is also a valuable tool. After all, for ADX to move above 25, it must first tilt up.
Hence, the ADX slope will be positive even before it crosses 25. This change of slope gives us an early signal to a trending market. Similarly, when ADX slopes down, the market might be entering a trading range.
In a nutshell, paying attention to ADX slope compensates for the lagging nature of the ADX indicator.
Interpreting ADX Slope
Rising ADX slope means trending market
The chart above shows daily price bars of SPY. The lower panel shows the ADX indicator.
The background color of the chart is green when ADX is rising and turns red when ADX is falling. (I used the Chart Background Color Indicator for this.)
Looking at the ADX slope gave earlier signals to a trending market. The ADX slope turned positive at two points that hinted at a trending market.
If we had waited for ADX to rise above 25 to confirm the trend, the signal would come almost a month after the first hint from ADX slope.
Of course, the ADX slope is no Holy Grail. ADX slope changes directions frequently and is more prone to giving false signals. However, if you pay attention to the price action together with the slope of ADX, you can cut false signals reliably.
This is how you do it. When prices are moving in one direction, the slope of ADX should stay positive. Look at the downswing near the left-hand side of the chart. During that downswing, prices are falling, but ADX slope fluctuated up and down. So we ignore those signals.
Compare this to the first hint of the uptrend that we pointed out. Prices have risen before the change in ADX slope. Prices continued to increase with ADX sloping up for consecutive bars. This is a more reliable sign that a trend is in place.
Falling ADX points to Ranging Market
Again, the ADX slope gave a signal of a ranging market almost three weeks earlier than traditional ADX analysis.
Once we confirm that the market is ranging, be doubtful of positive ADX slope signals as failed breakouts are common. Unless the positive ADX slope comes with a definite breakout from the trading range, assume that the breakout will fail.
Bollinger Bands are useful for estimating the support and resistance levels within the range. The Gimmee bar trading strategy uses Bollinger Bands to trade ranging markets. Employing the ADX slope to scan for sideways market before looking for Gimmee bars is a good idea for swing traders looking for trade opportunities.
ADX Slope is not a well-kept secret
Okay, I must confess. Using ADX slope is not that much of a mystery. (In fact, please be doubtful of any trading secrets, especially those that cost you $3,000 each.)
Several advanced users of ADX has discussed using the ADX slope for trading in forums and trading books. I shall redeem myself by listing them here for you.
- Why ADX > 20 is a Lie discussion on Traderslaboratory
- Direction is the Key to Using ADX Correctly
- ADXcellence: Power Trend Strategies
Keep practicing and make the most out of this fantastic indicator.
paul says
February 26, 2016 at 3:59 AMHi,
Just read your very interesting article on correct use of ADX indicator. Would you please advice if the chart background coloring (based on ADX increase / decrease) indicator is available for public use. If so, is that something you would be prepared to issue to my email?
Thanks in anticipation. Thanks also for a very enlightening article.
Kind regards,
Galen Woods says
February 26, 2016 at 1:11 PMThanks for the comment. Glad to help. Check your email!
Eddie says
April 30, 2016 at 11:38 PMNice interpretation. Kindly email for further appreciation.
Thanks.
Galen Woods says
May 3, 2016 at 3:57 PMThanks for the comment Eddie. Check your email!
Nil's says
May 30, 2016 at 12:16 PMHey Galen Woods, a nice strategy. Can you provide me details on chart background coloring (based on ADX increase / decrease) indicator?
Sometime I had seen that when ADX reached to 100 it drastically fall down to its middle range at least with the market price as well. Can you enlighten this ?
Galen Woods says
June 1, 2016 at 10:27 AMThanks for the comment! What charting platform do you use?
With typical settings, it’s unlikely that ADX will hit 100. What ADX settings are you using?
Sunil says
July 4, 2016 at 7:54 AMHow to use adx in India
Galen Woods says
July 5, 2016 at 12:05 PMI’m not familiar with the Indian market, but the same approach of paying attention to the ADX slope applies.
reginald hunter says
July 6, 2016 at 11:06 AMJust found this article on color changing adx indicator could you please email it to me? thanks in advance.
Galen Woods says
July 8, 2016 at 12:55 PMThanks for the comment. Glad to help. Check your email!
Dave says
September 8, 2016 at 11:54 AMHi i was just wanting to know what to set my ADX period up to its default is 14 should i keep it at that ?
Galen Woods says
September 12, 2016 at 7:37 AMHi, for a start, you can keep it at the default 14.
Jørgen says
September 28, 2016 at 6:53 PMHello Galen Woods. I am new in day trading and would like to work with the ADX slope indicator. Do I have to buy this indicator or can I download it from a website?
Best regards
Jørgen.
Galen Woods says
September 29, 2016 at 1:08 AMHello! I’ll be adding the indicator soon. I’ll let you know once it’s up.
Jørgen says
September 29, 2016 at 2:09 AMHello Galan. Thank you very much. How much do I need to pay?
Galen Woods says
September 30, 2016 at 3:58 PMPay what you want! Learn more here.
Galen Woods says
December 8, 2016 at 11:44 AMIt’s done! Click here to get the background color indicator. Follow the instructions for Example 1 to get the ADX slope colour.
Robert C A Alleyne says
October 19, 2016 at 2:30 AMHello Galan,
Great article on the ADX system and using it in a very positive way. I am a firm believer in the value of the ADX indicator. I know we cannot see into the future and all indicators are basically reactive and as such lag. But using the ADX Slope indicator is the next best thing than seeing the future in my opinion. I would greatly appreciate it if you can send me the indicator along with the changing chart background. Very very useful tool.
Many thanks
Robert
Galen Woods says
October 24, 2016 at 10:24 AMHi Robert, thank for the sensible comments there. We can’t see into the future. Check your email for the indicator!
RAVINDRA says
November 13, 2016 at 12:39 PMSIR
CAN U POST THE INDICATOR SET UP OF ADX TO MY EMAIL?
REGARDS
RAVI
Galen Woods says
November 20, 2016 at 8:50 AMHi, I’ll be adding the indicator soon. I’ll let you know once it’s up.
Nitin says
November 22, 2016 at 12:05 PMNice article. How to implement colour change in price chart for falling / rising ADD? Please email to my address. I am using investing.com for charts.
Galen Woods says
December 8, 2016 at 11:48 AMThanks! I don’t think the charts on Investing.com has the option to colour the background according to indicator value changes. But NinjaTrader has that option. You can find out how to implement that with NinjaTrader. Click here to get the background color indicator. Follow the instructions for Example 1 to get the ADX slope colour.
Ian Morrison says
November 24, 2016 at 11:44 PMHello Galen;
Great article. I too have been trading while trying to keep a close eye on the ADX slope. However it is often hard to detect with the naked eye. Your indicator would be exactly the visual that I have been looking for. I am looking for a version for metatrader4. Do you know if any such indicator exists? I can’t find anything myself.
Appreciate any help.
Thanks and regards,
Ian
Galen Woods says
November 29, 2016 at 2:41 PMThanks Ian. I’m not familiar with MT4. I tried combing through some forums for you, but the search turned up empty too. I’ll let you know if I find anything.
shiraz says
December 5, 2016 at 10:43 AMJust read your very interesting article on correct use of ADX indicator. Would you please advice if the chart background coloring (based on ADX increase / decrease) indicator is available. What a concept!
Galen Woods says
December 8, 2016 at 11:45 AMRight now I only have the indicator for NinjaTrader 7. Click here to get the background color indicator. Follow the instructions for Example 1 to get the ADX slope colour.
Jimmy Vitale says
June 14, 2017 at 3:02 AMHi Mr. Woods
Good article on the ADX. Thank you. We are developing an ADX strategy to be used with major index 3x ETFs; currently using an ADX 10; DI+ DI- 10 setting. Might you have a suggestion for a more optimal ADX DI setting?
Many thanks
Jimmy
Galen Woods says
June 15, 2017 at 12:26 AMHi Jimmy, your settings sound like a good starting point. But much depends on how you intend to use the indicator and your time frame as well. I wish you all the best with its development.
Moe Caron says
October 9, 2017 at 2:27 AMHi Galen
Very interesting article on ADX background color. I trade NQ futures with NT8 platform, Could you provide the ADX slope chart backgound coloring for NT 8. Much appreciated Thanks
Galen Woods says
October 12, 2017 at 10:07 AMHi Moe, great to hear from you. Right now, I only have the background indicator for NT7, which you can find here. I’ll work on an NT8 version soon and update you once it’s done.
Update: The indicators for NT8 is now available. Click the link above to learn more.
Gytis says
March 16, 2018 at 4:50 PMJust found this article on colour changing adx indicator could you please email it to me? thanks in advance.
Galen Woods says
March 17, 2018 at 8:37 AMHi Gytis, what’s your charting platform?
M SIVA says
April 13, 2018 at 9:01 PMDear Sir,
Greetings
Please can u send me the indicator for mt4.
Back ground colour change while sloping
Thanks and regards
M.Siva
Galen Woods says
April 17, 2018 at 12:54 AMHi Siva, right now we only have the indicator for NT7. I’ll update this page once there’s a version for MT4.
Connor says
May 9, 2018 at 2:25 PMJust read your great article on correct use of ADX indicator. Is the chart background coloring (based on ADX increase / decrease) indicator available for public use. If so, is that something you would be prepared to issue to my email? I use TC2000.
Thanks in anticipation.
Galen Woods says
May 11, 2018 at 1:12 PMHi Connor, I only have the indicator for NT7 right now. I’ll let you know if I can find something that works for TC2000. You can also try looking for an SMA indicator that changes its color according to its slope, and if TC2000 allows, nest the ADX indicator within this SMA indicator.
Kumar says
September 9, 2018 at 9:31 AMHi Galen,
Is this ADX indicator with background changing colors available in C# for Protrader platform? I am a swing trader who trades stocks, futures and options, currencies and commodities.
Galen Woods says
September 10, 2018 at 11:23 AMHi Kumar, I don’t have the indicator for the Protrader platform. Only for NinjaTrader 7 and 8 at the moment.