adx

Average Directional Index (ADX) is a technical analysis indicator used to quantify the strength of a price trend, regardless of its direction. It is part of the Directional Movement System developed by J. Welles Wilder and is typically displayed alongside two directional indicators, +DI and -DI. The ADX line is commonly calculated over a 14-period window using Wilder’s smoothing method.

Calculation and components: The indicator relies on true range and directional movements. From these, smoothed values for +DI and -DI are derived. The directional index (DX) measures the absolute difference between +DI and -DI as a percentage of their sum, and ADX is obtained by smoothing DX over time. While +DI and -DI indicate potential trend direction, ADX reflects the strength of that trend.

Interpretation: ADX values help assess whether a market is trending and how strong that trend is. Generally, an ADX below 20 suggests a weak or no trend, 20 to 25 indicates a developing trend, and values above 25 imply a trend is present. Higher values imply a stronger trend, with very high readings (often 40 or higher) signaling a particularly powerful move. Importantly, ADX does not indicate direction; it only measures strength. Traders typically use +DI and -DI crossovers for directional signals, while watching ADX for trend strength and its changes over time.

History and use: Wilder introduced the ADX in 1978 in his work New Concepts in Technical Trading Systems. Today, it remains a widely used tool in technical analysis, often employed in conjunction with other indicators to confirm trend strength and timing.

Limitations: ADX is a lagging indicator and can generate late signals. It may give false readings in ranging markets, so it is commonly used with complementary indicators to improve reliability.