ADX indicator was created by Welles Wilder. ADX is included in Directional Movement System, that is described in his New Concepts in Technical Trading Systems book.

Average Directional Index belongs to the oscillators. It is used to determine the trend strength on the market. ADX values varies between 0 and 100, value bellow 20 meaning a weak trend, values above 40 meaning very strong trend. Values above 60 are rare enough.

It is important to remember, that the high values of ADX do not mean strong Uptrend. They just mean a strong trend generally. It can be either Uptrend or Downtrend.

See the picture above. The ADX is ploted by white colour, +DI — green colour, -DI — red colour

ADX alone consist of two other indicators – »’Positive directional indicator»’ (abbr. »+DI» — green curve) and »Negative directional indicator» (abbr. »–DI» — red curve). These two indicators indicate the real strength of the trends: +DI indicates the strength of an Uptrend and –DI indicates the Downtrend strength. By their coupling we can get the DX and finally the ADX indicator (after we smooth the DX by chosen moving average).

All curves mean:

ADX indicates the trend strength generally. +DI indicates the strength of an Uptrend and finally -DI indicates the strength of the Downtrend.

These indicators tohether create Directional Movement System as a whole. That is the reason why you can find sometimes the ADX being as DMS or DMI (Directional Movement Indicator/Index) entitled.

How to use the indicator:

If the ADX values excess 20 points upwards, it probably signalizes the beginning of a new trend — either Uptrend or Downtrend. The strength of the trend begins to rise. If the indicator values fall bellow 40 downwards, it probably means the end of the trend, cause the trend weakens continuously.

We can use the ADX parts: +DI and –DI indicators to decide whether to enter a Long or a Short trade.

For an Uptrend the rising +DI and falling –DI is typical. For an Downtrend the falling values of +DI and rising values of -DI are typical. It means that if +DI rises above –DI upwards, the bulls are prevailing. It is better to enter the Long trend, cause there is stronger Uptrend than Downtrend. If –DI rises above +DI, the bears prevail and there’s Downtrend on the market. It is beter to enter Short trade in such case.

Traders try to avoid markets, where +DI a –DI are moving sideways, close to each other. In such case, when there is none sign of one of the indicators prevailing, the market is very choppy and there could be a lot of losses made on such market.

If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.