The Ultimate Trend Indicator: Understanding the Average Directional Index ADX

The optimization indicates the best results on the S&P 500 is 35 days for the DMs (DI) and 15 days for the ADX high/breakout. In general, high numbers on both optimizations give the best results. Even on commodities, we fail to produce better numbers than in the S&P 500. Yes, ADX is a profitable indicator if configured correctly. Our 10-year testing suggests the ADX(14) crossing 20 has outperformed the S&P 500 over the last ten years.

ADX Trend Indicator

Utilizing ADX alongside +DI and -DI can help you discern trend stability and strength more effectively. Effective money management and risk assessment involve ADX as a gauge for placing stop losses. Should the ADX trend weaken, tightening your stop loss could protect your capital. Moreover, a strong ADX trend may provide the confidence to allocate more money to a position, adjusting risk management parameters accordingly. According to our in-depth testing, an ADX(DMI + 14) setting crossing above 20 is a profitable buy signal, and crossing below 20 is a reliable sell signal.

What is +DI?

Backtesting is the evaluation of a particular trading strategy using historical data. Results presented are hypothetical, and there is no guarantee that the same strategy implemented today would produce similar results. A technical indicator called the Average Directional Index (ADX) is used to gauge how strong a trend is.

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This can also be considered an ADX indicator PDF or one akin to where a technical oscillator is plotted. In layman’s terms, a series of higher ADX peaks means trend momentum is increasing, whereas a series of lower ADX peaks means trend momentum is decreasing. By recognizing and avoiding these pitfalls, traders can use the ADX more effectively in their technical analysis. When configuring the Average Directional Index (ADX), traders often aim to refine the indicator to enhance its effectiveness in various market conditions. Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website. They have 20+ years of trading experience and share their insights here.

ADX Breakout Strategy

Welles Wilder developed the Average Directional Index (ADX) as an indicator of trend strength. He developed the ADX Indicator with commodities and daily prices in mind, but it can also be applied to stocks. Traders use the ADX value to filter out less probable trade signals. A common threshold is an ADX value above 25, indicating a strong trend.

Futures, futures options, and forex trading services provided by Charles Schwab Futures & Forex LLC. Where the current low price should be greater than the current high subtracted from the prior high. Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. The DMI is positive (plus) when the current high minus the prior high is greater than the prior low minus the current low.

For example, a trader might find that an ADX reading of 20 provides an earlier indication that the price of a security is trending. Conservative traders may want to wait for readings of 30 or above before employing trend following strategies. ADX is plotted as a single line with values varying from zero to 100. When you take a trade, you must make sure that the Average directional index is moving upwards and is above 25. If the trend moves upwards then it resembles that the trend is becoming strong. This indicator uses the strength of the trend from ADX to decide how the SuperTrend (ST) should behave.

Conversely, ADX values below 25 might indicate a weaker trend or range-bound conditions, prompting traders to employ strategies suited for sideways movement. The Average Directional Index (ADX) is a popular technical indicator used by traders and investors to measure the overall strength of a trend. Developed by Welles Wilder in 1978, the ADX is a part of the Directional Movement System, which aims to determine the presence and direction of market trends. The ADX is calculated using expanding price range values, making it a valuable tool for identifying whether the market is trending or non-trending. In summary, the Average Directional Index (ADX) is a powerful and widely used technical indicator for determining the strength and direction of a trend in financial markets.

When the +DI is above the -DI, the trend is considered bullish, and when the -DI is above the +DI, the trend is considered bearish. The smoothed moving average of price changes over a given time period is used to calculate ADX. Together with the ADX itself, the formula also entails calculating the positive and negative directional movements (+DM and -DM) and their smoothed averages. The ADX Indicator, or Average Directional Index, is a technical analysis tool for gauging a trend’s strength.

If ADX is above 25  and the +DMI line moves upwards, which is from below to above the -DMI line then this indicates a buy signal. The Adx indicator has a range of where 0 denotes the weakest trend and 100 the strongest. There needs to be thrust in prices before adx goes above any barrier or level say 25/10 or even 10/ The Di plus or Di minus should be above ADX. This indicates the change in direction or change in underlying price and obviously followed by ADX indicator which is dependent on user which level it… Those interested in learning more about ADX and other financial topics may want to consider enrolling in one of the best technical analysis courses currently available. Access to real-time market data is conditioned on acceptance of the exchange agreements.

The two screenshots below show this nicely and the ADX rises both during the uptrend (first screenshot) and during the downtrend (second screenshot). Since ADX is non-directional, this shows the reversal is as strong as the prior trend. Traders may find readings other than 25 are better suited to indicate a strong trend in certain markets. Similarly , you can use ADX along with Supertrend also to take buy or sell trades. If we get Supertrend buy SIgnal land ADX is above 25 , means buy signal may work well as buy signal has come in a strong trending stock. The chart above shows four calculation examples for directional movement.

This could lead to some trade signals occurring too late to be of use. A reading of 20, or 25, or 30 doesn’t mean that trend will persist. The indicator can’t predict a trend will continue, only that the security trended recently. Conversely, it is often hard to see when price moves from trend to range conditions. ADX shows when the trend has weakened and is entering a period of range consolidation. Range conditions exist when ADX drops from above 25 to below 25.

  1. Your strategy might involve using RSI for entry or exit signals and ADX to confirm the trend’s robustness.
  2. It is an indicator developed by Welles Wilder to measure volatility in commodities.
  3. Swing traders might accumulate into a position when the lines contact in anticipation of a breakout.
  4. These practical tips can help you optimize your use of the ADX indicator and better understand trend direction and volatility.
  5. The information provided by, Inc. is not investment advice.

Before selling a stock, we must analyze the trend of the particular stock in a weekly and monthly chart. If ADX is above 23  and the +DMI line moves downwards, which is from above to below the -DMI line then this indicates a sell signal. A Negative adx trendindikator Directional Index (-DI) is the difference between current lows and previous lows. When the negative DI moves upwards then there will be a downtrend in the market. When the negative DI moves downwards then there will be an uptrend in the market.

An ADX value above 25 is generally considered a strong trend, while a value below 20 is regarded as a weak trend or range-bound market. When the ADX is rising, the trend is gaining strength; when it is falling, it is weakening. Additionally, the +DI and -DI lines can be used to identify the direction of the trend.

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