Average Directional Index (ADX)

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Average Directional Index (ADX)

The Average Directional Index (ADX) is a technical indicator that measures the strength of a trend—up or down—without indicating its direction by itself. It is usually plotted with two companion lines: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (−DI). Together these three lines help traders decide whether to trade, which direction to favor, and when to exit.

Key points

  • ADX measures trend strength; +DI and −DI show trend direction.
  • ADX above ~25 typically indicates a strong trend; ADX below ~20 indicates a weak or non-trending market.
  • Trade signals commonly use DI crossovers confirmed by ADX level (e.g., +DI crossing above −DI with ADX > 25).

How ADX is calculated (Wilder’s method, typically 14 periods)

  1. Calculate directional movements for each period:
  2. +DM = current high − previous high (use this value only if it is greater than previous low − current low, otherwise +DM = 0).

  3. −DM = previous low − current low (use this value only if it is greater than current high − previous high, otherwise −DM = 0).

  4. Calculate True Range (TR) for each period:

  5. TR = max(
    current high − current low,
    |current high − previous close|,
    |current low − previous close|
    ).

  6. Smooth the 14-period sums using Wilder’s smoothing:

  7. First smoothed value = sum of the first 14 values.
  8. Subsequent smoothed value = previous smoothed − (previous smoothed / 14) + current value.

  9. Apply this to +DM, −DM and TR (the smoothed TR is the ATR for ADX).

  10. Compute directional indicators:

  11. +DI = (smoothed +DM / smoothed TR) × 100

  12. −DI = (smoothed −DM / smoothed TR) × 100

  13. Compute the Directional Movement Index (DX):

  14. DX = (|+DI − −DI| / (+DI + −DI)) × 100

  15. Compute ADX:

  16. First ADX = average of the first 14 DX values.
  17. Subsequent ADX = ((prior ADX × 13) + current DX) / 14

Interpretation and trading use

  • ADX value:

  • ~25 — trend is considered strong.

  • < ~20 — trend is weak or market is ranging.
  • Trend direction:
  • +DI > −DI suggests upward trend bias; −DI > +DI suggests downward trend bias.
  • Common signals:
  • Potential long entry: +DI crosses above −DI while ADX is above 20–25 (confirmation of strength).
  • Potential short entry: −DI crosses above +DI while ADX is above 20–25.
  • Exits: reverse DI crossover or falling ADX indicating waning trend.
  • ADX rising indicates strengthening trend; ADX falling indicates weakening trend.

ADX vs. Aroon

  • Both measure trend presence and strength, but use different calculations and timing.
  • ADX typically uses three lines (+DI, −DI, ADX). Aroon uses two lines (Aroon Up and Aroon Down) and focuses on how recently highs or lows occurred.
  • Crossovers and signals from each indicator may occur at different times; they can be complementary.

Limitations

  • ADX is a lagging indicator because of smoothing; it may signal after a move has started.
  • DI crossovers can produce frequent false signals in choppy or range-bound markets—especially when ADX is below ~25.
  • ADX does not indicate trend direction by itself; use +DI/−DI or price action for direction.
  • Best used in combination with price analysis and other indicators (e.g., RSI, moving averages) to filter signals and manage risk.

Practical tips

  • Use ADX to decide whether to apply trend-following strategies (when ADX is high) or range-bound strategies (when ADX is low).
  • Confirm DI crossovers with ADX level and price structure (support/resistance, breakouts).
  • Consider smoothing period adjustments if you need faster or slower responsiveness than the standard 14-period.

FAQs

Q: What ADX value indicates a good trend?
A: Generally, ADX above ~25 indicates a strong trend; below ~20 suggests a weak or non-trending market.

Q: Is ADX a reliable indicator?
A: ADX is useful for identifying trend strength but performs better when combined with price analysis and other indicators because it can lag and produce false signals in choppy markets.

Q: Which indicators pair well with ADX?
A: Momentum and timing tools such as RSI, moving averages, MACD, or price-action signals can complement ADX by helping with entries, exits, and confirming direction.

Bottom line

ADX is a practical tool for measuring trend strength. When combined with +DI/−DI (for direction) and other-confirming tools or price action, it helps traders choose appropriate strategies—trend-following when ADX is strong, and range strategies or caution when ADX is weak.