ADX — Average Directional Index

Overview

The Average Directional Index (ADX), developed by J. Welles Wilder in 1978, measures the strength of a trend — not its direction. It’s a crucial complement to directional indicators: ADX tells you whether a trend is worth trading or whether the market is chopping sideways.

ADX is plotted as a single line oscillating between 0 and 100. Typically displayed together with two supporting lines: +DI (Plus Directional Indicator) and −DI (Minus Directional Indicator), which together do indicate direction.

Formula

+DI = 100 × smoothed(+DM) / ATR
-DI = 100 × smoothed(-DM) / ATR
DX  = 100 × |(+DI - -DI)| / (+DI + -DI)
ADX = smoothed average of DX (Wilder smoothing)

Default period = 14

Default Settings

• Period: 14
• Strong trend threshold: ADX above 25 (some use 20)
• Very strong trend: ADX above 40
• Weak / no trend: ADX below 20

How to Use It

1. Trend Strength Filter

The primary use:

• ADX above 25 → trend exists, trend-following strategies have edge
• ADX below 20 → no clear trend, mean-reversion strategies preferred
• ADX between 20–25 → transitional, lower confidence

2. Direction via +DI / −DI

• +DI above −DI → uptrend bias
• −DI above +DI → downtrend bias

Crossover of +DI and −DI in a high-ADX environment is a meaningful trend-change signal.

3. Rising vs Falling ADX

The direction of ADX itself matters: rising ADX means the trend is strengthening; falling ADX means trend is weakening (regardless of direction).

Strengths

• Unique — one of the few indicators specifically for trend strength
• Helps decide between trend-following and mean-reversion regimes
• Robust filter for breakout strategies (require ADX rising before entry)

Weaknesses & Common Mistakes

• Lagging — by the time ADX confirms a trend, much of the move has happened
• Confusing ADX direction with price direction — ADX rising in a downtrend means the downtrend is getting stronger, not that price is rising
• Treating 25 as magic line — the threshold is approximate; some markets need 30+ to be clearly trending

Best Combinations

• ADX + Moving Average — only take MA crossovers when ADX above 25
• ADX + Breakout strategies — require rising ADX to confirm valid breakout
• ADX + RSI — if ADX low, use RSI mean reversion; if ADX high, ride trends

Practical Example

EUR/USD daily chart. ADX climbs from 18 to 28 over several days while +DI moves above −DI. Trend confirmed. Wait for next pullback to 20 EMA, enter long with stop below recent low. Hold until ADX starts falling or +DI crosses below −DI.

Bottom Line

ADX won’t tell you what to trade, but it’ll tell you when trend-following has an edge versus when the market is just noise.