Average Directional Index
Technical IndicatorsAn indicator that measures the strength of a trend without indicating its direction. ADX values above 25 suggest a strong trend; below 20 indicates a weak or absent trend. Often used with +DI and -DI lines to determine trend direction.
What Is the ADX?
The Average Directional Index (ADX), another creation of J. Welles Wilder, answers one critical question: is the market trending or ranging? The ADX line itself ranges from 0 to 100 and measures trend strength regardless of direction. It is derived from two other lines: +DI (positive directional indicator) and -DI (negative directional indicator), which measure upward and downward movement respectively.
Reading ADX Values
ADX below 20: the market is range-bound or consolidating. Between 20 and 25: a trend may be emerging. Above 25: a strong trend is in place. Above 40: the trend is very strong. Above 50: an extremely powerful trend (relatively rare). The ADX does not tell you whether the trend is up or down. For direction, look at +DI and -DI: when +DI is above -DI, the trend is bullish; when -DI is above +DI, bearish.
ADX Trading Strategy
A classic approach: enter when +DI crosses above -DI (bullish) or -DI crosses above +DI (bearish), but only if ADX is above 20 and rising. This filters out crossovers that occur during weak, directionless markets. Exit when ADX starts declining from a high level, which signals the trend is losing momentum. The default period is 14, which works well on daily charts for pairs like EUR/USD and GBP/USD.
Related Terms
Aroon Indicator
A trend identification system consisting of two lines, Aroon Up and Aroon Down, that measure how recently a pair reached its highest high or lowest low over a set period. Values range from 0 to 100.
Moving Average
A widely used indicator that smooths price data by calculating the average closing price over a specified number of periods. Moving averages help identify trends and potential support/resistance levels.
Parabolic SAR
A trend-following indicator that places dots above or below price to indicate the current trend direction and potential reversal points. SAR stands for "Stop and Reverse," reflecting its dual role as a trend identifier and trailing stop.