The Ultimate Trend Indicator: Understanding the Average Directional Index ADX

adx indicator formula

The ADX line is used to determine if an asset is trending or not. A strong trend is in place when ADX is above 25, so there’s a sense to use trend-trading strategies. Consequently, when the ADX is below 25, avoiding trend trading and choosing an appropriate range trading strategy is better. To quantify a trend’s strength, the calculation of the ADX is based on the moving average (MA) of a price range expansion over a certain timeframe.

How should traders approach using the ADX in their strategies?

adx indicator formula

In other words, some trend-following or breakout strategies may have a lot in common with mean reversion trading strategies when coupled with high ADX readings. The ADX could also be used alongside other technical analysis tools, in order for traders to get a clearer picture of a trend. An ADX chart will usually feature three lines, the ADX, the positive directional indicator (+DI) and the negative directional indicator (-DI). ADX values range between 0 and 100, where high numbers imply a strong trend and low numbers imply a weak trend.

ADX Indicator in Trading Strategies

ADX calculations are based on a moving average of a price range expansion over a specific time period to quantify trend strength. The default setting recommended by Wilder is 14 bars, although other timeframes can be implemented. The Average Directional Index was initially designed by Welles Wilder for commodity daily charts, but was then modified so that it could be used in other markets and for various timeframes. When evaluating trading strategies, it’s useful to understand how the Average Directional Index (ADX) compares to other technical indicators in gauging trend strength and momentum.

How to implement the Average Directional Index

Alternatively, when the -DI crosses past the +DI line, and the ADX reading is above 20, then they may see this as an excellent opportunity to sell and go short (bear market DI crossover). It is an indicator developed by Welles Wilder to measure volatility in commodities. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. As such, the ADX is essentially the smoothed average of the DX, giving you a clearer view of trend strength. Utilizing ADX alongside +DI and -DI can help you discern trend stability and strength more effectively. Do you want to test any indicator, chart pattern, or performance for any US stock?

The Best Settings, Timeframes, and Levels for ADX

The Negative Directional Movement (-DM), is equal to the current low minus the previous low, if it’s bigger than +DM and greater than zero. The formula for calculating ADX may be hard to grasp at first, and is something you could skip if you only want to know how to use the indicator. If the red line(-DI) is higher than the green line(+DI) that is generally an indication of a bearish trend.

  1. When it’s sloping upwards, it’s a sign that the uptrend is getting stronger.
  2. Example of Plus Directional Movement.In the next chart, we have a -DM, since the range portion is below the range of the previous bar.
  3. When any indicator is used, it should add something that price alone cannot easily tell us.
  4. The Average Directional Index (ADX) is a specific indicator used by technical analysts and traders in order to determine the strength of a trend.
  5. Look for ADX values above 25-30, and combine it with directional movement indicators to determine the trend direction.
  6. So it's wise to use ADX along with other technical indicators to determine specific entry and exit points.

The ADX reading is an average of the absolute difference between these two values, which is the reason why it only shows the strength of the trend, and not its direction. In a trading range, the trend is sideways, and there is general price agreement between the buyers and sellers. ADX will meander sideways under 25 until the balance of supply and demand changes again.

adx indicator formula

It is worth noting that this approach was designed over 50 years ago when the markets behaved quite differently. When the +DI becomes greater than the -DI, it means that the market is rising and so it will be appropriate to open a long position, and vice versa. Welles figured that this system allows a trader to ride the trend. A lower value indicates a sign of accumulation or distribution. On average, if ADX is below 25 for more than 30 bars, the price enters into a range and has a possibility to consolidate. Hence, to capture this “missing” volatility Wilder created ATR.

adx indicator formula

The ADX Indicator, or Average Directional Index, is a technical analysis tool for gauging a trend’s strength. Developed by Welles Wilder, it is integral to many traders’ strategies and provides insights into market momentum and trend strength. While this may hold true in some cases, the opposite could hold true as well. For example, sometimes a high ADX reading could be a sign that a market has been depleted of its current trend strength, and soon is about to turn around.

Used to measure the strength of a trend, ADX is one of the most versatile trading indicators out there. The general interpretation is that ADX values above 25 signal a strong trend, while readings below 15 suggest a calm market that’s not trending at the moment. Then, depending on the ADX level, we may decide to employ mean reversion or trend following strategies. For example, we might want to go long on a new breakout only if ADX is showing high readings, which signals that the trend is strong and healthy.

However, ADX tells you when breakouts are valid by showing when ADX is strong enough for prices to trend after the breakout. When ADX rises from below 25 to above 25, price is strong enough to continue in the direction of the breakout. When ADX is below 25 for more than 30 bars, price enters range conditions, and price patterns are often easier to identify. Price then moves up and down between resistance and support to find selling and buying interest, respectively. The chart above is an example of an uptrend reversing to a downtrend. Notice how ADX rose during the uptrend, when +DMI was above -DMI.

The chart below shows the average directional index indicating an increasingly strong uptrend as average directional index readings rise from below 10 to nearly 50. Wilder can be considered the father of several technical indicators that are now regarded as the core principles of technical analysis software. On top of the ADX, these include the Average True Range, the Relative Strength Index (RSI), and the Parabolic SAR.

The ADX works best when combined with other technical indicators, like the relative strength index (RSI). While the ADX measures the intensity of the trend, the RSI can help with entries and exits by giving a time-based component to the trend. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances.

My analysis, research and testing stems from 25 years of trading experience and my Financial Technician Certification with the International Federation of Technical Analysts. The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. He notices that the ADX value of Crude Oil futures is below 20. If the -DI is above the +DI, when the ADX moves above 25 that could trigger a short trade. There are a number of ways the DMI can be used to trade, in addition to the general guidelines discussed above. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.