ADX (Average Directional Index)

The Average Directional Index (ADX) measures how strong a trend is, regardless of whether it is up or down. J. Welles Wilder introduced it in 1978, together with the two Directional Indicators: +DI, which measures upward movement, and minus DI, which measures downward movement. Together they answer two questions every trader asks: is the market trending, and if so, which side is in control?

The three lines#

When +DI is above minus DI, upward movement dominates; when minus DI is above +DI, downward movement dominates. ADX rises when either side dominates strongly and falls when the market moves sideways.

How it is calculated#

The calculation, usually over 14 periods, builds up in steps:

1. Directional movement: compare today's high with yesterday's high (upward movement) and today's low with yesterday's low (downward movement). Only the larger counts each day.
2. True range: the ATR (Average True Range) concept, the largest of today's range and the gaps from yesterday's close.
3. +DI and minus DI: smoothed upward and downward movement divided by smoothed true range, as percentages.
4. DX: the absolute difference between +DI and minus DI divided by their sum, times 100.
5. ADX: a smoothed average of DX.

DX = |(+DI) − (−DI)| ÷ ((+DI) + (−DI)) × 100
ADX = smoothed average of DX over n periods

Reading ADX levels#

These thresholds are guides, not rules. What matters as much as the level is the direction: a rising ADX means the trend is strengthening, a falling ADX means it is weakening, even if the price is still moving the same way.

Common ADX signals#

1. Trend filter: trade trend strategies only when ADX is above 20 to 25; trade range strategies when it is below 20.
2. DI crossovers: +DI crossing above minus DI is a bullish signal; minus DI crossing above +DI is bearish. Wilder suggested acting on these mainly when ADX is high enough to confirm a trend.
3. ADX turning down from high levels: after a strong trend, a falling ADX from above 40 often shows the trend is losing strength, a reason to tighten stops rather than an automatic reversal signal.
4. ADX rising from low levels: a move from below 20 to above 25 can signal a new trend starting, often after a breakout from consolidation. See Range Structure and Consolidation.

Common confusion: ADX does not show direction#

A high ADX in a falling market means a strong downtrend, not a bullish signal. Always check +DI and minus DI, or price structure, for direction. Many beginners buy because "ADX is high and rising" and end up buying into a strong decline.

Limitations#

• Lag: heavy smoothing makes ADX slow to respond.
• Thresholds vary by market: some markets trend with lower ADX readings than others.
• Whipsaws in DI crossovers when ADX is low.

Common mistakes#

• Reading high ADX as bullish without checking direction.
• Trading every DI crossover in a market with low ADX.
• Using ADX alone for entries rather than as a filter.

Frequently asked questions#

What does the ADX indicator measure?#

The strength of a trend on a scale from 0 to 100, regardless of whether the trend is up or down.

What is a good ADX level for trend trading?#

Many traders consider readings above 25 a sign of a meaningful trend and below 20 a sign of a range.

How do +DI and minus DI work?#

They measure the strength of upward and downward price movement. When +DI is above minus DI, upward movement dominates, and vice versa.

Sources#

• Wikipedia, Average directional movement index