Average Directional Index (ADX)

🔍 What is ADX?

The Average Directional Index (ADX) is a technical indicator used to determine the strength of a trend. It doesn’t indicate the direction of the trend (up or down), but rather how strong the trend is.

Developed by J. Welles Wilder, ADX is part of the Directional Movement System, which also includes the +DI and -DI lines that show trend direction.

🛠 How Does It Work?

ADX ranges from 0 to 100:

• 0–25: Weak or no trend

• 25–50: Strong trend

• 50–75: Very strong trend

• 75–100: Extremely strong trend (rare)

⚙️ How to Read It

1. ADX rising above 25: A strong trend is beginning.

2. ADX falling below 20–25: Trend is weakening or range-bound.

📖 Best Settings

• Default ADX setting is 14 periods, and it works well on most timeframes.

• However, traders can adjust based on strategy:

  • Short-term trading: Use 7–10 period.

  • Long-term trend analysis: Use 20–30 period.

  

💡 How to Use It in a Strategy

Example strategy:

• Enter long when ADX > 25.

• Enter short when < 25.

• Avoid trading when ADX < 20, as the market is likely moving sideways.

You can also combine ADX with:

• Moving Averages: Confirm trend direction.

• RSI: Spot overbought/oversold zones in trending markets.

• Candlestick Patterns: For additional confirmation.

🚫 Common Mistakes

❌ Using ADX Alone: It shows trend strength, not direction. Always combine with other tools. ❌ Ignoring Low ADX: Low ADX can still mean volatility is coming – watch for breakouts. ❌ Overreacting to Spikes: One spike doesn’t confirm a trend – look for consistent movement.

🧠 Final Thoughts

The ADX is a powerful tool to evaluate trend strength, especially when combined with directional indicators and other strategies. It helps traders stay in strong trends and avoid choppy, sideways markets. While it doesn’t predict price direction, it provides a clearer view of the market environment — which is essential for smart decision-making.