The Average Directional Index (ADX) is one of the most powerful tools for measuring trend strength in technical analysis. Developed by J. Welles Wilder Jr. in 1978, the ADX helps traders determine whether a market is trending or moving sideways, making it essential for choosing the right trading strategy.
What is the ADX Indicator?
The ADX is a technical indicator that measures the strength of a trend, regardless of its direction. Unlike momentum indicators that tell you if prices are going up or down, the ADX tells you how strong that movement is. The indicator ranges from 0 to 100, with higher values indicating stronger trends.
Key insight: The ADX does not tell you the direction of the trend. It only tells you how strong or weak the current trend is. You need to combine it with other indicators to determine trend direction.
Understanding ADX Values
The ADX reading gives you valuable information about the market condition:
- 0-20: Weak or absent trend. The market is likely moving sideways or consolidating. Range-bound strategies work best here.
- 20-40: Moderate trend strength. A trend is emerging or already in progress. This is often a good time to enter trend-following trades.
- 40-60: Strong trend. The market has clear directional momentum. Stay with the trend and avoid counter-trend trades.
- 60-100: Extremely strong trend. These readings are rare and often indicate climactic moves that may be nearing exhaustion.
The DMI Component: +DI and -DI Lines
The ADX is part of the Directional Movement System, which includes two additional lines called the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI). These lines help determine trend direction.
How to Read +DI and -DI
- When +DI is above -DI, the trend is bullish (upward)
- When -DI is above +DI, the trend is bearish (downward)
- When +DI crosses above -DI, it signals a potential buy opportunity
- When -DI crosses above +DI, it signals a potential sell opportunity
How to Calculate the ADX
While most trading platforms calculate ADX automatically, understanding the calculation helps you interpret the indicator better:
- Calculate True Range (TR): The greatest of current high minus low, absolute value of current high minus previous close, or absolute value of current low minus previous close.
- Calculate Directional Movement: +DM is the current high minus previous high (if positive), -DM is the previous low minus current low (if positive).
- Smooth the values: Apply a 14-period exponential moving average to TR, +DM, and -DM.
- Calculate +DI and -DI: Divide smoothed +DM and -DM by smoothed TR, then multiply by 100.
- Calculate DX: Absolute difference between +DI and -DI divided by their sum, multiplied by 100.
- Calculate ADX: Apply a 14-period smoothed moving average to DX.
ADX Trading Strategies
Strategy 1: Trend Confirmation
Use the ADX to confirm whether a trend is worth trading before entering a position.
Example Setup
You spot a bullish pattern on the chart. Before entering:
- Check if ADX is above 25 (indicating sufficient trend strength)
- Verify +DI is above -DI (confirming bullish direction)
- Enter the trade with confidence that the trend has momentum
Strategy 2: Avoiding Choppy Markets
One of the best uses of ADX is knowing when NOT to trade. When ADX is below 20, the market is likely choppy and prone to whipsaws. During these periods, trend-following strategies will likely result in losses.
Strategy 3: ADX Breakout Strategy
When ADX rises from below 20 to above 20, it often signals the start of a new trend. This is called an ADX breakout.
- Wait for ADX to cross above 20 from below
- Determine direction using +DI and -DI crossover
- Enter in the direction of the emerging trend
- Place stop-loss below recent swing low (for longs) or above swing high (for shorts)
Combining ADX with Other Indicators
The ADX works best when combined with other technical tools:
- Moving Averages: Use ADX to confirm trend strength, then use moving average crossovers for entry signals.
- RSI: When ADX shows strong trend (above 25) and RSI shows overbought/oversold, you might be near a reversal point.
- Support and Resistance: Strong ADX readings at key price levels can signal breakouts.
- MACD: Combine MACD for direction and ADX for strength confirmation.
Common ADX Mistakes to Avoid
- Using ADX for direction: Remember, ADX only measures strength. Always use +DI/-DI or another indicator for direction.
- Trading low ADX readings: When ADX is below 20, step aside or use range-bound strategies instead.
- Ignoring ADX peaks: When ADX reaches extreme highs (above 50) and starts to decline, the trend may be exhausting.
- Using wrong timeframes: ADX on shorter timeframes can be noisy. Daily charts often provide more reliable signals.
ADX Settings and Customization
The default ADX setting uses a 14-period lookback. However, you can adjust this based on your trading style:
- Shorter periods (7-10): More sensitive, better for short-term trading but more false signals.
- Longer periods (20-25): Smoother, better for swing trading and filtering noise.
- Standard (14): Balanced approach suitable for most traders.
Track Your ADX Trades
Pro Trader Dashboard helps you analyze your trades and see which technical setups work best for your strategy. Track your ADX-based trades and optimize your approach.
Summary
The ADX indicator is an essential tool for measuring trend strength. Use it to confirm trends before entering, avoid choppy markets, and identify when new trends are beginning. Remember that ADX measures strength, not direction, so always combine it with directional indicators like +DI/-DI, moving averages, or MACD.
Ready to learn more about technical indicators? Check out our guide on RSI indicator or learn about MACD.