Average Directional Index (ADX)
The ADX measures the strength of a trend, not its direction: it ranges from 0 to 100 and above 20-25 indicates a marked trend.
It was devised by J. Welles Wilder together with the two directional lines: +DI measures the strength of rises, −DI that of falls. The ADX tells how strong the trend is, the comparison between +DI and −DI whether it's up or down.
How it's calculated
For each period you calculate the positive directional movement (rise in the high), the negative one (fall in the low) and the true range. The three series are smoothed with Wilder's method over 14 periods: +DI and −DI are the directional movements divided by the true range × 100. DX = |+DI − −DI| / (+DI + −DI) × 100; the ADX is Wilder's average of DX over 14 periods.
Worked example
If +DI is 28 and −DI is 12, DX is |28 − 12| / (28 + 12) × 100 = 16 / 40 × 100 = 40. If the average DX over the last 14 periods (the ADX) is 32, the trend is strong and, with +DI above −DI, upwards.
How to read it
ADX below 20: a market without a clear trend, where oscillators work better. ADX above 25 and rising: a strong trend, where it pays to follow the direction shown by +DI and −DI.
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