ADX — Simple tool to make money!

The average directional movement index (ADX) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument.

 ADX has become a widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI).

The ADX combines them and smooths the result with an exponential moving average.

ADX is a lagging indicator that measures the trend strength without regard to trend direction.

ADX is formed by combining two other indicators which are positive directional indicator (abbreviated +DI) and negative directional indicator (abbreviated -DI).

Positive Directional Indicator is calculated based on differences between current high and previous high over recent trading periods. Similarly Negative Directional 

Indicator is calculated based on differences between current low and previous low over certain recent trading periods.

ADX will range between 0 and 100 and is usually calculated based on 14 time-periods. Usually 20 is used as the key level for analysing ADX.

Since ADX enables one to quantify trend strength, it helps to identify the strongest trends as well as range conditions. So, appropriate trading strategy can be used. In trending conditions, one can enter on pullbacks and trade in direction of the trend where as in range conditions, one can trade on reversal either at support (bullish) or at resistance (bearish). In range conditions, another strategy can be to combine ADX with RSI (overbought and oversold) signal.

Different researchers have come out with various ways to interpret ADX. Some of the popular ones are as below:

ADX below 20 indicates absence of trend and similarly ADX above 25 indicated strong trend. So, avoid trending strategies when ADX is below 20 as the market will be range bound and price action happens sideways.

 Increasing ADX values above 20, indicates increasing trend strength, thereby uptrending ADX confirms either bullish or bearish trends supporting decision to either buy or sell.

ADX crossing over 25 from below especially after being below for 30 bars or so, indicates that price has broken out of range with sufficient strength and that now trend trading strategies can be profitably deployed.

ADX above 50 indicates extremely strong trend.