- Type of Indicator: Trend Strength
- Creator: J. Welles Wilder Jr.
- When Created: 1970s
- First Mentioned In: New Concepts in Technical Trading Systems by J. Welles Wilder Jr.
What Is The Average Directional Index (ADX)?
The Average Directional Index (ADX) is a technical analysis tool that is used to measure the strength of a trend. It is a non-directional indicator, meaning it does not provide information about the direction of the trend, but rather only its strength.
The ADX is derived from the Directional Movement Index (DMI), which consists of three lines: the positive directional indicator (+DI), the negative directional indicator (-DI), and the ADX line. The ADX line measures the strength of the trend based on the difference between the +DI and -DI lines.
How Do You Read The ADX?
The ADX provides traders with information about the strength of a trend. The tool can be used to identify potential trend reversals and to confirm trends that are already in place.
How Does The ADX Work?
The ADX works by measuring the strength of a trend based on the difference between the +DI and -DI lines.
When the ADX is above a reading of 20, it indicates that the trend is strong. When it is below the threshold, it indicates that the trend is weak.
How Is The Average Directional Index Calculated?
The calculation for the ADX involves smoothing the difference between the +DI and -DI lines over a specific time period. This is typically 14 days.
The resulting value is then smoothed again over the same time period to produce the ADX line.
How Do You Use The Average Directional Index?
Trend Identification: Traders can use the ADX to identify potential trend reversals and to confirm trends that are already in place. When the ADX is above a certain threshold, it may indicate that the trend is strong. When it is below the threshold, it may indicate that the trend is weak.
Entry and Exit Points: Traders can use the ADX to identify potential entry and exit points. For example, a buy signal may be generated when the ADX line crosses above the threshold. A sell signal may be generated when it crosses below the threshold.
Divergence: Traders can also use the ADX to identify potential divergence between the price and the indicator. For example, if the price is making higher highs while the ADX line is making lower highs, it may indicate a potential trend reversal.
Additional Trading & Risk Management Tips
Adjust the threshold for the ADX to suit your specific trading style and the market you are analyzing. Higher thresholds may be more useful for identifying stronger trends. In contrast, lower thresholds may be more useful for identifying weaker trends.
Be aware that the ADX is a lagging indicator. This means it reflects past price movements and may not accurately predict future price movements. Therefore, use it in conjunction with other technical analysis tools to make more informed trading decisions.
Use proper risk management techniques to protect your investments, and always consider other factors in addition to the ADX when making trading decisions.
Monitor the position of the ADX line relative to the threshold for potential buy and sell signals, and adjust your trading strategy accordingly.
Finally, practice using the ADX on historical data and demo trading accounts to evaluate its effectiveness for your specific trading style and market conditions before incorporating it into your live trading strategy. Practice using the Average Directional Index with a TradingView account to backtest performance.