Average Directional Index
Measures the strength of a trend regardless of direction. Readings above 25 typically indicate a tradeable trend.
Description
The Average Directional Index (ADX) was developed by J. Welles Wilder and published in his 1978 book New Concepts in Technical Trading Systems. Unlike most trend indicators, ADX measures trend strength rather than direction — it rises whether price is trending up or down, making it genuinely direction-neutral.
How It Works
ADX is derived from two directional movement indicators: +DI (positive directional indicator, measuring upward price movement) and -DI (measuring downward movement). ADX itself is a smoothed average of the ratio of the difference to the sum of +DI and -DI. It ranges from 0 to 100 in theory, but readings above 60 are uncommon in most instruments.
How to Read It
ADX below 20 suggests a weak or absent trend — ranging conditions where trend-following strategies typically underperform. ADX above 25 indicates a trending market is in force. Above 40 signals a strong trend. Above 50 is unusually strong and sometimes precedes exhaustion. To determine direction, compare +DI and -DI: if +DI is above -DI, the trend is up; if -DI is above +DI, it is down. When ADX peaks and begins declining, the current trend may be losing steam.
Common Uses
- Filtering strategies by market regime — only use trend-following when ADX is above 25
- Switching between trend-following and mean-reversion approaches
- Identifying trend exhaustion when ADX rolls over from a high reading
- Confirming that a breakout has genuine momentum behind it
Caveats
ADX is a lagging indicator — by the time it confirms a trend, a substantial portion of the move may already have occurred. The smoothing process is slow, and ADX can remain elevated well after a trend has ended. Like all of Wilder’s indicators, it was designed for daily charts and can behave erratically at lower timeframes. It also gives no directional guidance on its own; +DI and -DI must be read alongside it.