Most professional traders know that following a strong trend can be very profitable. By being able to recognize a strong trend, traders can invest and enter the market with much greater accuracy and certainty. The only problem is identifying a strong trend and knowing when it ends in a live market.
By looking at the daily price action history in your MT4 chart, and with some help of available tools, you could quickly spot a trending market. You don’t even need any custom MT4 indicators to to do that.
When you look at the price action in your MT4 terminal and draw your trend lines or support/resistance lines you can spot strong trends right away.
Below is an example of a weekly chart of EURGBP. You can see that there were some very strong trends. Some of them lasted over 13 weeks, that’s around 3 months.
However, in hindsight, everything seems easy. Those charts will represent actions that have already happened. That was all in the past and unfortunately history can not be traded in the present.
The current price action is quite unpredictable and a different story. Nevertheless, there are certain methods which can help with identifying the strength of an existing trend.
How do you define a strong trend
A strong trend is a prolonged price movement generally in one direction, either up (uptrend) or down (downtrend). We speak of strong trends if the overall price movement spans over at least couple of days, but could also be weeks or months.
The best way to see strong trends in the market is by looking at the daily and the weekly charts, as in the screenshot above. 4-Hour chart or 1-Hour chart can only show a temporary stronger trend or a fraction of a strong trend.
Temporary strong trends, lasting a day or two, can still be considered strong trends and many experience day-traders will take advantage of such opportunities. (more on this later)
Free trend strength indicator in MT4
Your MetaTrader 4 terminal includes many free indicators that are by default included in each installation. There are a few indicators in the package that can help you with measuring an existing trend (also read Free Trend Indicators in MT4). Yet only one indicator really measures the intensity and strength of a existing trend.
The Average Directional Movement Index (ADX) indicator
This indicator, developed by Welles Wilder, is the only free MT4 indicator that measures the strength of a trend. It does not measure anything else, just the intensity of an existing trend. The ADX indicator is quite unique in how it measures the trend’s strength because it will not indicate the direction of a forming trend. In other words, it will not show you whether it is an uptrend or downtrend. It will only show you how powerful the present trend really is at the present moment.
Here is how to add the Average Directional Movement Index (ADX) indicator to your MT4 chart. The indicator can be found in the Trend indicators section. Go to Insert – Indicators – Trend – and choose Average Directional Movement Index.
How to read the free ADX trend strength indicator
The Average Directional Movement Index indicator measures the strength of a trend between the values of 0 to 100. When the indicator is placed on the chart it will open a new, separate dedicated window. This will display three lines between the levels of 0 and 72, although values can go to 100.
The green line visible in the image above is the indicator of the ADX level. The most important thing that if the line is below 25, it is assumed that the trend is weak or non-existent. Anything above 25 is considered to be a strong trend. The higher the level is, the stronger the trend. The line rarely reaches the 100 level or the 0 level, it’s usually oscillates between 10 and 70.
How do traders take advantage of strong trends
Being able to identify strong trends in the markets is very useful, but traders also need to know how to take advantage of the opportunities presented within trending markets. So how can traders or investors take advantage of the presence of a strong trend? Well, they can do this in a number of ways.
Swing trader or long-term investor
They can make money by riding the trend until it reverses. The removed swing trader or a long-term investor would enter the trend early and hold the position until the trend comes to an end. This would be a single trading opportunity spanning over the duration of the entire trend and market movement.
Scalping daytraders
The more active day-traders would scalp a strong trend by recognizing a common pattern and trading it multiple times using a prediction model. Within an uptrend when the price action moves upwards, there are higher highs and higher lows. Within a downtrend there are lower lows and lower highs. Daytraders can take advantage of those natural oscillations within a strong trend.
Custom MT4 strength indicators based on ADX
There are some additional custom indicators that are built based on the ADX indicator or include some of its functions. These are not included with your MetaTrader installation, but can be installed and added to the platform.
Our flagship TrendViper MT4 trend indicator is a perfect example of a technical indicator that uses the ADX trend strength calculations to filter signals in indecisive markets. The signals are generated with moving average crossovers and they are filtered by an ADX filter. This is also visually presented on the MT4 charts by an ADX power bar that measures the intensity of a trend.