Average Directional Index ADX

April 7, 2010 by Philip 7 Comments

ADX Average Directional Index is the unbiased trend indicator. It will tell you how strong the
trend is without caring about the direction of the trend.

The Average Directional Index technical indicator was created by J. Welles Wilder with the
intention of having an objective measurement of the strength of a trend. This is an important
feature as we often trade trending markets different from sideways market. For example,
overbought RSI in an up trending market is not a signal to go short whereas overbought relative
strength index-RSI in a trading range is much closer to being a signal. The ADX is far from
perfect. It has the same issue like other technical indicators of lagging the price action and it
doesnt tell you what the direction of the trend is.

Learn to Identify Strength of a Trend

using This Techincal Indicator
ADX is calculated by using a moving average of price expansion over a specific period. The
default settings are 14 but this can of course be changed to suit your style and timeframe. The
ADX is derived from two directional movement indicators (DMI).
ADX oscillates between 0 and 100 where readings above 60 are rare. It is therefore important to
split the values up into categories.
0-25 Sideways market
25-50 Trending market
50-75 Strong trending market
75-100 Very strong trending market
Tips and ideas
So, how can we trade using the average directional index technical indicator? The ADX is a
great tool to help you pick the best trending instruments before looking for specific entry signals.
It is also a great tool for traders who trade the fade.
1. Using ADX as a filter when looking for continuation patterns is a great idea. Small
continuation patterns such as flags work best when the preceding trend has been strong. By only
1

taking the entry when ADX shows a reading of min 25 you will increase your odds
tremendously.
2. If you are a trader who likes to picks tops and bottoms then it is better to do so in sideways
market. Here you can simply say that if the ADX is under 25 then your filter gives you the signal
to look for entries.

ADX Chart

Our Implementation of Technical Analysis

Using ADX
I personally like being a bit picky about my trades so I add a little rule to my ADX filter saying
that ADX needs to be above 25 for 3 bars before I considering it to be trending. The opposite can
be said for a ranging market of 3 bars under 25. Look back on some charts to see what length
works best for you.
Check out the next Technical Indicator in the education section: Bollinger Bands

About Philip
My name is Philip and in my spare time I am creating a safe learning environment for aspiring
traders to learn what it takes to become a successful technical / analytical market trader.

Comments

Tim says
April 1, 2015 at 1:35 pm
Hi Philip
Thank you really massive for creating this wealth of knowledge and
making it available to every one online. Its really helpful.
Quick question
Does ADX only measure the strength of an upward trend(bullish)?
If not, how is it used to determine the strength of a bearish trend
since it does not have negative values?
Cheers
Tim
Reply

Philip says
April 7, 2015 at 12:30 am
Hi Tim
No ADX measures the strength of a trend and this can be either an
uptrend or a downtrend. So it is important to use other tools or
analysis to determine the direction of the trend when using ADX.
Reply

halil ozcurumez says

August 8, 2014 at 4:10 am

Hi Philip,
Do you have signal services for day traders.
kind regards
halil
Reply

Philip Thygesen says

August 8, 2014 at 4:47 am
Hi Halil
No sorry I do not.
Philip
Reply

Sol Ezra says

September 10, 2013 at 1:28 am
Hi Philip, Ive been a student and fan of yours for some time now
and have learned alot. My problem is that I have a full time job and
would like to continue trading but for longer swing trades and I
wondered if you do a signal service of any sort. I mainly trade
indices especially the DAX and FTSE thanks Sol
Reply

Henk Stoel says

4

December 17, 2014 at 2:30 am

I like the concept of your program and the videos
My problem is that the readability of the videos is very poor. Is it an
option to change the black background?
Reply