Average Directional Movement Index

The Average Directional Movement Index (ADX), is a technical analysis indicator used in financial trading that aims to gauge the strength of a trend of a given asset.

Released in 1978 by Welles Wilder, the ADX is one of the few technical tools that are directionally neutral.

The sole purpose of the ADX indicator is to measure a trend’s force, without acknowledging its direction.

However, despite being unable to offer what is usually considered vital information, the indicator is surprisingly very useful to technical traders.

This is due to its ability to consistently inform traders whether a particular trend is worthwhile jumping into.

The ADX is actually an oscillator, with minimum and maximum levels of 0 to 100 within which the main signal line fluctuates.

Usually there are two other lines displayed as well, +DI line -DI line, which are used to form the main ADX signal line.

Lower values indicate weak trends and higher values indicate stronger trends.

The actual formula behind the ADX uses moving averages of a given time period, with the default value being 14 periods.

Readings below 25 can signify a very choppy market, between 25 and 50 a medium strength trend, 50 to 75 a very strong trend, and the trend strength above 75 is considered to be especially dominant.

However, different traders set their values according to their custom trading methodology.

How to Trade Using DX

The ADX is used as a filter in conjunction with other trading indicators, and never by itself.

Many traders prefer to use the ADX with other oscillators that provide direction and divergence, such as the Stochastic Oscillator, or RSI.

Unlike the ADX, these do not tell the trader a great deal concerning a trend’s strength. This combination can give the trader key detail when deciding on whether to enter a trade or not.

Typically, trend traders using the ADX will only choose the more powerful trends, i.e. those with an ADX value of at least above 50.