ADX Indicator: Measuring How Strong a Trend Really Is

Most indicators try to tell you where price is going. The Average Directional Index asks a different question: is there a trend worth following at all?

Where it comes from

J. Welles Wilder Jr., a former mechanical engineer, introduced the ADX in his 1978 book New Concepts in Technical Trading Systems. The same book gave traders the RSI, the Average True Range and the Parabolic SAR. Wilder wanted an objective way to separate trending markets from sideways ones, because a method that thrives in one often loses money in the other.

How it is built

The ADX comes with two companion lines, +DI and −DI. Each day, Wilder compares the new high and low with the previous day’s. If the high extends further upward than the low extends downward, the move counts as upward directional movement; the reverse counts as downward. He smooths each series over a lookback period, usually 14, and divides it by the Average True Range. The result is +DI, the pressure from buyers, and −DI, the pressure from sellers. The gap between the two lines, relative to their sum, is smoothed once more to produce the ADX. This extra smoothing is why the ADX moves slowly and lags behind price.

Reading the ADX

The ADX shows strength, not direction. A market falling steadily produces a high ADX just as a rising one does. A rising ADX means the trend is gaining strength; a falling ADX means it is weakening or the market is turning sideways. A falling ADX does not by itself mean the trend has reversed. Wilder treated 25 as the key level, and below 20 most traders see a weak or absent trend.

ADX reading zones A scale with four zones: below 20 weak or no trend, 20 to 25 a trend may be starting, 25 to 40 trending, and above 40 a strong trend. ADX measures strength only; it never shows direction Weak or no trend range tools fit better Trend may start wait for confirmation Trending trend tools fit better Strong trend momentum is high 0 20 25 40 60+
Figure 1. Common ADX reading zones. The thresholds are conventions, not laws.

Finding the direction

Direction comes from the two companion lines. When +DI is above −DI, buyers dominate; when −DI is above +DI, sellers do. A cross of the two is a signal, but in a sideways market the lines cross constantly and most of those signals fail. That is why many traders act on a DI cross only when the ADX is above 25, as in Figure 2. Notice that the cross came first and the ADX confirmed the trend several bars later. Confirmation costs a late entry; that is the price of filtering out noise.

Illustrative price chart with ADX, +DI and -DI Price moves sideways, then rises strongly, then flattens. Below it the ADX stays low, rises through 25 during the uptrend, peaks near 49 and falls back as the market goes sideways. The +DI line crosses above the -DI line before the ADX rises. Price (illustrative) 25 20 +DI crosses above −DI ADX rises through 25 ADX under 20 ADX +DI −DI
Figure 2. Illustrative data computed with the standard 14-period formulas. The DI cross comes first; the ADX confirms later.

Using it with care

Use the ADX to choose the tool, not to pick the trade. When it is high, trend-following methods such as moving averages and breakouts have the advantage. When it is low, range tools such as the stochastic and support and resistance fit better, or staying out is a valid choice. Remember its limits. It lags by design, so a high reading can appear after much of a move is done. The 20 and 25 levels are habits, not laws, and the best values differ by market and time frame. Test them on your own charts before risking money.

Educational content only. It is not investment advice, and trading involves risk of loss.

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