How to trade with ADX
If ADX is traded below 20, there is no trend or the trend is weak; therefore, a non-trend-following strategy could be used.
If ADX is traded above 20 but below 40, it is time to apply trend following methods. An example would be trading moving averages or trading with Parabolic SAR indicator.
When ADX reaches 40 level, it suggests an overbought/oversold (depending on the trend) situation on the market. It is time to protect some profits or move stop loss order to break-even.
When ADX passes 40 level, it is a good time to begin collecting profits and gradually scaling out of the trades on rallies and sell-offs and protecting remaining positions with trailing stops.
ADX -/+ DI lines are used for spotting entry signals. All -/+ DI crossovers are disregarded while ADX remains below 20. Once ADX peaks above 20 a buy signal occur when +DI (green) crosses upwards and above -DI (red). A sell signal will be the opposite: +DI would cross -DI downwards.
ADX indicator is never traded alone, but rather in combination with other indicators and tools. ADX indicator, most of the time, gives much later signals comparing to faster reacting moving averages crossover or Stochastic; however, reliability of ADX indicator is much higher than for other indicators.
