The Average Directional Index (ADX) is a technical indicator developed by J. Welles Wilder Jr. to measure the strength of a trend regardless of its direction. Unlike most indicators that tell you which way to trade, ADX tells you whether you should be using trend-following or range-trading strategies. This makes it invaluable for adapting your trading approach to current market conditions.
What is ADX?
ADX measures trend strength on a scale from 0 to 100. It does not indicate trend direction, only how strong the trend is. ADX is derived from two other indicators: the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI).
Key concept: ADX answers the question "How strong is the current trend?" A high ADX means strong trend (either up or down). A low ADX means weak trend or sideways market. Direction is determined by +DI and -DI, not ADX itself.
The Three Components
ADX Line
Measures trend strength from 0 to 100:
- 0-25: Weak or absent trend (ranging market)
- 25-50: Strong trend
- 50-75: Very strong trend
- 75-100: Extremely strong trend (rare)
+DI (Plus Directional Indicator)
Measures bullish movement strength. When +DI is above -DI, bullish pressure is dominant.
-DI (Minus Directional Indicator)
Measures bearish movement strength. When -DI is above +DI, bearish pressure is dominant.
How to Read ADX
ADX Value Interpretation
- ADX below 20: No trend or weak trend - use range-trading strategies
- ADX above 25: Trend is developing - consider trend-following strategies
- ADX above 40: Strong trend - stay with the trend
- ADX rising: Trend is strengthening
- ADX falling: Trend is weakening
Reading the Full Picture
ADX: 35 (strong trend)
+DI: 28, -DI: 15 (+DI above -DI)
Interpretation: Strong uptrend in progress. Good conditions for trend-following long trades.
DI Crossovers for Direction
- +DI crossing above -DI: Bullish signal
- -DI crossing above +DI: Bearish signal
DI Crossover Caution
DI crossovers can generate false signals in ranging markets. Always check ADX level before trading crossovers. Crossovers with ADX below 20 are less reliable.
ADX Trading Strategies
1. Trend-Following with ADX
- Wait for ADX to rise above 25 (trend confirmation)
- Check DI crossover for direction (+DI > -DI = bullish)
- Enter in the direction of the trend
- Stay in the trade while ADX remains above 25
- Consider exiting when ADX starts declining from high levels
2. Breakout Strategy
- Identify periods of low ADX (below 20) - consolidation
- Watch for ADX to start rising
- Enter when price breaks out of the range
- Rising ADX confirms the breakout has momentum
Breakout Example
Stock consolidates between $45-$50 for weeks.
ADX drops to 15 (no trend).
Stock breaks above $50, ADX starts rising toward 25.
Rising ADX confirms the breakout is real, not a fake-out.
3. Avoiding False Signals
- Only take DI crossover signals when ADX is above 20-25
- Avoid trend-following strategies when ADX is below 20
- Use range-trading strategies (support/resistance) when ADX is low
4. Trend Exhaustion
- When ADX reaches extreme highs (above 50-60) and starts turning down
- This can signal trend exhaustion
- Consider taking profits on trend-following trades
- Watch for potential reversal or consolidation
ADX Settings
- 14 period: Standard setting, developed by Wilder
- 7-10 period: More sensitive, better for shorter-term trading
- 20-25 period: Smoother, better for position trading
Combining ADX with Other Indicators
ADX with Moving Averages
- Use MA for trend direction
- Use ADX to confirm trend strength
- Trade MA signals only when ADX confirms strong trend
ADX with RSI
- In strong ADX trends, RSI can stay overbought/oversold
- Use RSI overbought/oversold signals only when ADX is low
- In high ADX environments, use RSI divergence instead
ADX with Bollinger Bands
- Low ADX often coincides with narrow Bollinger Bands
- Rising ADX with band expansion confirms breakout
- Good for identifying the start of new trends
Common Mistakes with ADX
- Using ADX for direction (it only measures strength)
- Trading DI crossovers in low ADX environments
- Expecting ADX to tell you when to enter trades
- Ignoring falling ADX while in a position
- Not adjusting strategy based on ADX readings
Limitations of ADX
- Lagging indicator - takes time to confirm trend changes
- Does not indicate direction on its own
- Can stay at low levels for extended periods during consolidation
- False signals possible during choppy markets
Best Practices for ADX
- Use ADX primarily to determine which type of strategy to employ
- High ADX = trend-following strategies
- Low ADX = range-trading strategies
- Always combine ADX with +DI/-DI for complete picture
- Monitor ADX direction, not just level
- Be patient - ADX takes time to confirm trend changes
Track Your Trend Trades
Pro Trader Dashboard helps you analyze how trend strength affects your trading performance and optimize your strategy selection.
Summary
The ADX indicator is essential for measuring trend strength and adapting your trading approach accordingly. ADX above 25 indicates a trending market suitable for trend-following strategies, while ADX below 20 suggests a ranging market better suited for support/resistance trading. The +DI and -DI lines provide direction, while ADX provides strength. Remember that ADX is a lagging indicator that confirms trends rather than predicting them. Use it to filter your trades and ensure you are using the right strategy for current market conditions.
Learn more: Moving Averages and ATR Indicator.