In this report, quantitative analysts Eric Kaoukji and Magnus Axén investigate the technical indicators Average Directional Index (ADX) and breakouts from consolidation patterns forming in the Forex market. 

A consolidation is a term used to describe stock price movement with a given support and resistance line for some period of time and is believed to be caused by market indecisiveness. When the price-movement breaks from this consolidating pattern a breakout has occurred, this either in a bullish (upwards) or bearish (downwards) movement. 

To try and establish a connection between momentum strength preceding the consolidation and how it is related to price movements post-breakout the Average Directional Index was used. The ADX is an indicator based on Average True Ranges and Directional Indicators to better describe the momentum a stock currently has.

An out of sample data test was constructed to test various strategies with ADX in contrast to a non-ADX-based strategy to formulate conclusions about the impact ADX had.

It was found that setting targets according to the cut-off of ADX=25 (which indicates a strong trend) had a more consistent and profitable impact on trades.

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