The market experiences varying states of volatility between range bound and trending conditions. During range bound markets we may adopt a very simple “buy low, sell high” approach, and during trending markets we may adopt a somewhat different approach such as”buy high, sell higher”. A great tool that can help us disseminate between these very different market environments is the ADX line. The ADX (Average Directional Index) shows us in which state the market is currently trading. As this indicator trends higher, the market tends to break to new highs or new lows, where as when this line trends to the downside, the buyers and sellers tend to push the market into a tight consolidated trading range. The following chart illustrates exactly how we may apply this indicator, even to a very short-term and volatile setup, such as a 5-minute GBPUSD chart. In this case buyers may assume a (long) position near the bottom Bollinger Band (set to 3-standard deviations), while the sellers line the upper band with their respective entry orders. We may continue to do so as long as the ADX remains in its current down trending state. However if the ADX reverses course, and begins to trend back to the upside, range bound traders should take caution as a new trend may soon develop. This simple combination of indicators can help us scalp small profits in a seemingly quiet and boring market, as we wait for the next big move.
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