Average Directional Index (ADX)

The Average Directional Index (ADX) is a trend strength indicator that measures how strong a price trend is, whether upward or downward. Unlike other indicators, ADX does not indicate trend direction, only the strength of the trend. It is typically plotted along with +DI (Positive Directional Indicator) and -DI (Negative Directional Indicator) to determine trend movement.

Significance & Purpose

• Measuring trend strength – A higher ADX value indicates a stronger trend.
• Filtering weak trends – Helps traders avoid false signals by identifying weak trends.
• Confirming breakout trends – Useful for identifying whether a breakout is real or false.
• Determining market conditions – If ADX is low, the market may be in a range rather than trending.

How is ADX Calculated?

• The ADX is calculated using Directional Indicators (+DI and -DI):
• ATR (Average True Range) is used to normalize values.

Interpreting ADX Values:

• Below 20 → Weak trend (market moving sideways).
• 20-40 → Moderate trend.
• Above 40 → Strong trend (good for trend-following strategies).
• How to Use It in Trading?
• Identifying Trend Strength:
  • ADX above 25 → Strong trend (trade with the trend).
  • ADX below 20 → Weak trend (avoid trend-following strategies).
• Trading Signals:
  • Buy when +DI crosses above -DI, and ADX is rising.
  • Sell when -DI crosses above +DI, and ADX is rising.