Technical Analysis Indicator - ADX - Average Directional Index

What is ADX?

ADX is used to quantify trend strength. ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 days, although other time periods can be used.

ADX is plotted as a single line with values ranging from a low of zero to a high of 100, usually plotted in the same window as the two directional movement indicator lines, i.e. he positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with an exponential moving average.

ADX is non-directional. It registers trend strength whether price is trending up or down.

How to interprete ADX?

When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend.

ADX values help traders to identify the strongest and most profitable trends to trade. The values are also important for distinguishing between trending and non-trending conditions.

ADX readings above 25 suggest that the trend's strength is strong enough for trend trading strategies. Conversely, when ADX is below 25, many will avoid trend trading strategies.

  • ADX Value < 25: Absent or weak trend
  • ADX Value between 25 and 50: Strong Trend
  • ADX Value between 50 and 75: Very Strong Trend
  • ADS Value between 75 and 100: Extremely Strong Trend

A falling ADX line only means the trend strength is weakening, but it usually does not mean the trend is reversing unless there has been a price climax, As long as ADX is above 25.

ADX can also show momentum divergence. When price makes a higher high and ADX makes a lower high, there is negative divergence. Negative divergence it is not a signal for a reversal, but rather a warning that trend momentum is changing. It may be appropriate to tighten the stop-loss or take partial profits.