ADX

The Average Directional Index, or ADX for short, is an oscillator. The ADX does not indicate trend direction, only trend strength. It is a lagging indicator; a trend must have established itself before the ADX will generate a signal that a trend is underway.

Trading in the side of a strong trend reduces risk and increases profit amount. In many cases, it is the ultimate trend indicator. ADX is used to measure trend strength. ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although the analyst can use other time periods also. ADX can be used on any trading instrument such as stocks, forex, commodity.

ADX is plotted as a single line with values ranging from a low of zero to a high of 100, with readings below 20 indicating a weak trend and readings above 40 signaling a strong trend.

When the +DMI is above the -DMI, prices are moving up and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend. The figure is an example of an uptrend reversing to a downtrend. Notice how ADX rose during the uptrend, when +DMI was above -DMI. When the price reversed, the -DMI crossed above the +DMI, and ADX rose again to measure the strength of the downtrend.