How to use ADX indicator for day trading
The ADX indicator day trading strategy starts with selecting the right settings.
Let me explain why:
Short-term charts are fast-paced, so you need to tweak the ADX setting to make it more sensitive to the short-term price changes in the market.
So…
The best ADX setting for day trading is the 3-period.
As a general rule, the shorter the period is, the more sensitive the technical indicator becomes to the price. Therefore, the 3-period ADX indicator works best for day trading.
As we already know, low ADX readings mean the trend strength is weak while higher ADX readings mean a strong trend. We also know from the natural ebb and flow of the market that prices move from periods of consolidation to trending and vice versa.
Now, if we combine the two market hypothesis we can conclude the following:
Low ADX readings (consolidation) should be followed by higher ADX readings (trend).
So…
When day trading with the ADX indicator, we look for clues to buy and sell when ADX falls below 25.
When the ADX falls below 25 it suggests that there is no strength in the trend and most likely we’re consolidating. This means we can look for potential intraday breakout signals.
But, since the ADX doesn’t show us the direction of the trend, we wait until the ADX breaks above 50:
If prices are rising with the ADX rising we buy
If price is falling with the ADX rising we sell
Nothing speaks louder than a trade example.
So, here is an example outlining the ADX day trading strategy in action: