Average Directional Index – ADX

April 7, 2010 by Philip 7 Comments

ADX – Average Directional Index is the unbiased trend indicator. It will tell you how strong the trend is without caring about the direction of the trend.

The Average Directional Index technical indicator was created by J. Welles Wilder with the intention of having an objective measurement of the strength of a trend. This is an important feature as we often trade trending markets different from sideways market. For example, overbought RSI in an up trending market is not a signal to go short whereas overbought relative strength index-RSI in a trading range is much closer to being a signal. The ADX is far from perfect. It has the same issue like other technical indicators of lagging the price action and it doesn’t tell you what the direction of the trend is.

Learn to Identify Strength of a Trend using This Techincal IndicatorADX is calculated by using a moving average of price expansion over a specific period. The default settings are 14 but this can of course be changed to suit your style and timeframe. The ADX is derived from two directional movement indicators (DMI).

ADX oscillates between 0 and 100 where readings above 60 are rare. It is therefore important to split the values up into categories.

0-25 Sideways market

25-50 Trending market

50-75 Strong trending market

75-100 Very strong trending market

Tips and ideas

So, how can we trade using the average directional index technical indicator? The ADX is a great tool to help you pick the best trending instruments before looking for specific entry signals. It is also a great tool for traders who trade the fade.

1. Using ADX as a filter when looking for continuation patterns is a great idea. Small continuation patterns such as flags work best when the preceding trend has been strong. By only

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taking the entry when ADX shows a reading of min 25 you will increase your odds tremendously.

2. If you are a trader who likes to picks tops and bottoms then it is better to do so in sideways market. Here you can simply say that if the ADX is under 25 then your filter gives you the signal to look for entries.

ADX – Chart

Our Implementation of Technical Analysis Using ADXI personally like being a bit picky about my trades so I add a little rule to my ADX filter saying that ADX needs to be above 25 for 3 bars before I considering it to be trending. The opposite can be said for a ranging market of 3 bars under 25. Look back on some charts to see what length works best for you.

Check out the next Technical Indicator in the education section: Bollinger Bands

About Philip

My name is Philip and in my spare time I am creating a safe learning environment for aspiring traders to learn what it takes to become a successful technical / analytical market trader.

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Comments

Tim says

April 1, 2015 at 1:35 pm

Hi Philip

Thank you really massive for creating this wealth of knowledge and making it available to every one online. It’s really helpful.

Quick question…

Does ADX only measure the strength of an upward trend(bullish)?If not, how is it used to determine the strength of a bearish trend since it does not have negative values?

CheersTim

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Philip says

April 7, 2015 at 12:30 am

Hi Tim

No ADX measures the strength of a trend and this can be either an uptrend or a downtrend. So it is important to use other tools or analysis to determine the direction of the trend when using ADX.

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halil ozcurumez says

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August 8, 2014 at 4:10 am

Hi Philip,Do you have signal services for day traders.

kind regards

halil

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Philip Thygesen says

August 8, 2014 at 4:47 am

Hi Halil

No sorry I do not.

Philip

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Sol Ezra says

September 10, 2013 at 1:28 am

Hi Philip, I’ve been a student and fan of yours for some time now and have learned alot. My problem is that I have a full time job and would like to continue trading but for longer swing trades and I wondered if you do a signal service of any sort. I mainly trade indices especially the DAX and FTSE thanks Sol

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Henk Stoel says

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December 17, 2014 at 2:30 am

I like the concept of your program and the video’sMy problem is that the readability of the video’s is very poor. Is it an option to change the black background?

Reply

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