Technical Glossary / Technical Indicators – Trend Indicators
Average Directional Index (ADX)
A measure of trend strength, without a bullish or bearish sign, built from directional movement.
Teaching sketch. It shows the shape, not a live quote and not a trade signal.
Formula
Plus DM and minus DM come from Wilder: the larger of the up-move or down-move in the highs and lows, if it is positive. DI+ and DI- scale those by ATR. DX = 100 x |DI+ - DI-| / (DI+ + DI-). ADX is a smoothed average of DX. The usual period is 14.
Definition
ADX says whether a market is trending, not which way. Rising ADX means directional movement is dominating. Falling ADX means the move is losing direction, often into a range. The direction sits in DI+ and DI-. ADX above 25 is a common label for a strong trend. ADX below 20 is a common label for a drift. The thresholds are conventions.
How it works
A strong downtrend produces high ADX just as a strong uptrend does. Selling because ADX is high, without looking at which DI is on top, is a category error. ADX also lags. It rises after the trend has started and stays high as the trend ages.
How traders use it
Use ADX as a filter. Breakout and trend tools when ADX is rising from low levels. Mean-reversion tools when ADX is low. Do not use a high ADX as a reversal signal. High means the trend is strong, which is a reason to be careful fading it, not a reason to fade it.
Common mistakes
Reading ADX as a signed oscillator, assuming above 25 is bullish. Also buying because ADX is oversold. ADX is not oversold. It does not have that scale.
Limitations
A spike will lift ADX and then ADX falls as the spike ages, even if price goes sideways at the highs. Pair it with the actual swing structure before you declare the trend over.
This note explains the term. A sketch shows the shape of the idea. Neither is a recommendation, a signal, or a comment on any security. Indicator settings and exchange conventions differ. Check the live chart and the contract specification before you use a number.