What is the Average Directional Index (ADX)?
– The ADX is a technical indicator that measures the strength of a price trend, regardless of its direction. It is part of a three-line system: the ADX line (trend strength), the +DI (positive directional indicator, showing upward pressure) and the -DI (negative directional indicator, showing downward pressure). Traders use the three lines to decide whether to use trend-following strategies or to stay out when markets are range-bound.
Key definitions (first-use jargon)
– ADX: Average Directional Index — a value, usually between 0 and 100, that quantifies trend strength.
– +DI / -DI: Positive and negative directional indicators — scaled measures of upward vs downward movement.
– DM (Directional Movement): The raw up or down movement from one period to the next (difference between highs or lows).
– ATR (Average True Range): A volatility measure used to normalize DM values.
– DX: Directional Movement Index — the absolute difference between +DI and -DI divided by their sum, scaled to 0–100; ADX is a smoothed average of DX.
How the ADX is built — step-by-step (conceptual)
1. For each bar (period), compute raw directional movements:
– UpMove = current high − previous high
– DownMove = previous low − current low
– Accept only the larger positive move for +DM (otherwise +DM = 0) and the larger positive move for -DM (otherwise -DM = 0).
2. Compute the ATR over the chosen lookback (commonly 14 periods).
3. Smooth the +DM and -DM series using Wilder’s smoothing method (an exponential-style running average):
– First smoothed value = sum of the first n raw DM values.
– Subsequent smoothed value = prior smoothed − (prior smoothed / n) + current raw DM.
4. Convert smoothed DM to +DI and -DI:
– +DI = (smoothed +DM / ATR) × 100
– -DI = (smoothed -DM / ATR) × 100
5. Compute DX for each period:
– DX = (|+DI − -DI| / (+DI + -DI)) × 100
6. Smooth DX to get ADX (again commonly n = 14):
– First ADX = average of the first n DX values.
– Subsequent ADX = (prior ADX × (n − 1) + current DX) / n
Worked numeric example (using n = 14 smoothing; numbers simplified)
– Assume after smoothing you have:
smoothed +DM = 8.0
smoothed -DM = 3.2
ATR = 5.0
– Compute +DI and -DI:
+DI = (8.0 / 5.0) × 100 = 160.0
-DI = (3.2 / 5.0) × 100 = 64.0
(These are scaled examples; many markets produce much smaller DI values.)
– Compute DX:
DX = (|160 − 64| / (160 + 64)) × 100 = (96 / 224) × 100 ≈ 42.86
– Smooth into ADX (assume prior ADX = 30):
New ADX = (30 × 13 + 42.86) / 14 = (390 + 42.86) / 14 ≈ 30.92
What the readings commonly mean
– ADX 25: indicates a strong trend.
– Directional crossover signals:
– +DI crossing above -DI with ADX > 20–25 is a potential buy signal.
– -DI crossing above +DI with ADX > 20–25 is a potential sell/short signal.
– Crossovers when ADX is low (below ~20) often produce false signals.
Practical checklist for using ADX
– Set the lookback period (default 14 periods is standard).
– Check ADX level first: is it above your threshold for “trending” (commonly 25)?
– If ADX shows a strong trend, look at +DI vs -DI for direction.
– Confirm with price action or a secondary indicator (e.g., RSI, moving averages).
– Define entry, stop-loss, and profit targets before entering a trade.
– Beware of very rapid ADX spikes — they can be short-lived.
– Use position sizing and risk controls; ADX is lagging and not a perfect filter.
Limitations and common pitfalls
– ADX measures strength, not direction. Use +DI and -DI to determine direction.
– It is a lagging indicator because of smoothing; it can miss early parts of a new trend.
– Frequent crossovers when ADX is low can cause false signals and whipsaws.
– ADX can spike temporarily during brief surges and then reverse, giving misleading strength readings.
– Best used together with price analysis and at least one additional technical tool to reduce false entries.
Which indicators pair well with ADX?
– Relative Strength Index (RSI) — can help time entries/exits within a trending environment.
– Moving averages — to confirm trend direction and provide dynamic support/resistance.
– Price action (trendlines, structure) — always check actual price behavior; indicators are derived from price.
Is ADX a “good” indicator?
– It is useful as a trend-strength filter: it helps choose whether to apply trend-following or range-bound strategies.
– Like any indicator, ADX is not a standalone solution; it works best when combined with other analysis and risk management.
Sources for further reading
– Investopedia — Average Directional Index (ADX): https://www.investopedia.com/terms/a/adx.asp
– StockCharts School — Average Directional Index (ADX): https://school.stockcharts.com/doku.php?id=technical_indicators:average_directional_index_adx
– TradingView Wiki — Average Directional Index (ADX): https://www.tradingview.com/wiki/Average_Directional_Index_(ADX)
– Wikipedia — Average directional index: https://en.wikipedia.org/wiki/Average_directional_index
Educational disclaimer
This explainer is for educational purposes only and does not constitute personalized investment advice or a recommendation to trade. Indicators like the ADX are tools that should be combined with sound risk management and your own analysis.