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Average Directional Index Indicator

How to trading binary options successfully using only one index? To find the answer to the question is a dream not only for a beginner but an experienced trader. Indeed, if you have only one indicator or index, you do not have to clutter up the screen with unnecessary tools in an attempt to eliminate confusion and random errors.

Some experts say that it is impossible to trade using only one index but others say that there is a tool indicating the strength and direction of a market trend. It also gives a clear signal to open a transaction. It is the Average Directional Index (ADX). You can use it because it is available in the standard set of tools of Pocket Option.

Wells Wilder created the Average Directional Index in 1978 to indicate trend strength in a series of prices of a financial instrument.

You can find it below the chart but ADX is not an oscillator. Initially, the index was used on the stock exchange and, later, it gradually migrated to other financial markets.

ADX Appearance, Parameters and Signals

As mentioned above, the tool is located in a separate window under the chart. Like most oscillators (even though it is not an oscillator), it is a scale with signal lines.

In the Pocket Option terminal, ADX main line is red. It indicates the direction of market movement. The stronger movement indicates stronger current trend.

  • +DI or Positive Directional Indicator (blue) – reflects the strength of buyers;
  • -DI or Negative Directional Indicator (yellow) – reflects the strength of sellers.

As for the indicator parameters, Wells Wilder recommends using period 14 for the main and signal lines. At the same time, he recommends using the tool on time frames from 30 minutes to 4 hours to eliminate false signals triggered by market noise.

Pocket Option terminal has the recommended settings preinstalled. If you want, you can change the color and thickness of the lines.

Wells Wilder recommends relying on the following signals from the Average Directional Index:

  • Arrangement of signal lines relative to each other: if +DI, buys prevail, and if opposite, sales prevail.
  • When signal lines move away from each other it indicates stable trend, but, when the lines are “stuck together” or constantly intersect – it indicates a flat market.
  • The main ADX line indicates the strength of the main trend. The higher – the better.

Options Trading Using ADX

Based on the rules described above, it is recommended using the following algorithm:

  • Contracts must be acquired when signal lines cross.
  • CALL is acquired when +DI crosses –DI from bottom to top;
  • PUT is acquired when +DI crosses –DI from top to bottom;

A rule of thumb: The ADX line should be above the intersection.

Take into consideration and pay attention only the intersections that occurred during the change in the current trend. It means that you follow the lines were located at a distance from each other but then came closer and crossed.

The expiration period should be at least the time of formation of 2 candles.

In conclusion, we should say that, perhaps, Average Directional Index is not a magic wand but it definitely can help you make informed decisions on binary options.  It is easy to figure out how it works for both a novice trader and a professional.

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