What Is An Average Directional Index ADX?

If the market forms a trend, the oscillator will begin to rise, and the distance between +DI and -DI will increase. The larger the difference between +DI and -DI, the higher the ADX peaks. The maximum divergence in the positive and negative direction and the index line being above 40-50% correspond to https://traderoom.info/adx-trend-indicator/ the overbought and oversold zones, respectively.

The falling ADX, even at high levels, indicates that the downtrend is losing its strength. This might not be a reversal signal yet, but it suggests sellers are losing conviction. This combination uses the ADX for trend strength and the Parabolic SAR for entry and exit signals.

• A 2019 research study (revised 2020) called “Day Trading for a Living?
• Day traders typically watch for ADX readings above 25 to confirm trend strength and combine it with other indicators like moving averages.
• Over time, the ADX has become a staple in many trading platforms and is widely used by traders across various financial markets.
• The indicator is a well known one in trading as it helps traders identify whether the market is trending or moving sideways, thereby informing their trading strategies.

Moving Averages (MA)

The ADX indicator on TradingView does not display the +DI and -DI lines by itself, but you can use the Directional Movement Index (DMI) indicator to see all three at the same time. The Average Directional Movement Index (ADX) is a technical analysis indicator used by traders to quantify the strength of a trend. It’s derived from the Directional Movement Indicator (DMI). It does not indicate the direction of the trend, a rise or fall, but rather its strength.

The high on the day of the sell signal becomes the initial stop-loss. The ADX quantifies trend strength by measuring directional movement over a given time frame. It provides traders with specific numbers (from 0 to 100) that represent strong or weak price trends. Traders can simply refer to the numbers to quickly assess the strength of a trend. The average directional index (ADX) is a technical indicator used by traders to determine the strength of a financial security’s price trend. It helps them reduce risk and increase profit potential by trading in the direction of a strong trend.

It helps traders determine whether the market is trending or consolidating. The ADX is a lagging indicator… in fact ALL indicators are lagging indicators because they are all based on historical prices. The ADX is based on past price movements rather than predicting future price action. It calculates trend strength by analyzing historical price data through the Plus DMI and Minus DMI, which measure positive and negative price movements, respectively.

What is Fibonacci retracement? How to trade using this indicator?

• It’s reasonable to set a trailing stop instead of the regular stop.
• Longer periods, like 20 or 25, make the ADX less sensitive and smoother, reducing whipsaws.
• If this difference is negative, it is added to the previous minus DMI value.
• In conclusion, the ADX is a useful tool for measuring trend strength, but it has its limitations and potential pitfalls that users should be aware of.
• It calculates trend strength by analyzing historical price data through the Plus DMI and Minus DMI, which measure positive and negative price movements, respectively.
• If the ADX shows a strong trend after entering these zones, the impulse movement will continue for some time.

However, traders may choose to adjust this setting to make the indicators more or less sensitive based on their trading timeframe or the volatility of the market they are trading. Experimenting with different settings in a demo environment is a wise approach to determine the most effective parameters for your needs. The DMI helps determine the direction of price movements, while the ADX quantifies how strong the trend is, irrespective of its direction. The ADX itself doesn’t indicate bullish or bearish conditions – it only measures trend strength. You need to look at the +DI and -DI lines for directional bias. When +DI is above -DI, it suggests bullish momentum; when -DI is above +DI, it indicates bearish pressure.

In these conditions, +DI and -DI will often be close to each other, reflecting the indecision in the market. Traders would normally put their capital in other assets or buy at support and sell at resistance with the aim of making small profits. You notice that the ADX begins to gradually decline towards 25, even though the price is still making new highs. While price continues upwards, the ADX’s decline indicates that buying pressure is continuously weakening. You may decide to enter a long position, using a previous support level as your stop-loss. You need to monitor the ADX here, to ensure the trend continues to strengthen.

ADX Formula and Calculation

They can drastically affect the price; meanwhile, the indicators can show lagging data. You’re not advised to open trades during major news on the economic calendar, or at least increase stops on open trades. You will find out at the end of the review whether my search for a new trend succeeded or if the price continued to move in a downtrend.

How to use ADX indicator for Day Trading

We are waiting for the dotted +DI and -DI lines to start diverging and when the index line begins to exit the 0-20% zone at the same time. We open a trade in the trend’s direction 2-3 candles after the ADX crossed the 20th level. The best moment to exit the market is when +DI and -DI (after the maximum divergence) begin to converge and/or the index line goes down and crosses the 30% level. The maximum distance between + DI and -DI indicates an extremely strong trend.

During the divergence, you can see the strengthening trend, its movement is getting more powerful – there are changes in the slope angle. The point that the arrow points to is where the +DI and -DI lines swapped. Here you can see the EURUSD currency pair chart on the H1 timeframe.

ADX is a momentum oscillator which can offer insights into whether an asset is trending and if so how significantly. See our Terms of Service and Customer Contract and Market Data Disclaimers for additional disclaimers. Always do your own careful due diligence and research before making any trading decisions. Copyright © 2025 FactSet Research Systems Inc.Copyright © 2025, American Bankers Association. SEC fillings and other documents provided by Quartr.© 2025 TradingView, Inc.

The average directional index is a tool used by many technical analysts. Traders can use it to determine trends in the market and, more specifically, whether certain securities are trending. This can help them make important decisions about whether to hold off or advance on a trade—and which position to take if they make the trade. Technical analysis is a trading discipline that involves researching and analyzing past market data to make predictions about future performance. These individuals look for entry and exit points in the market using historical prices and trading volume. Charts, graphs, and other tools are important to technical analysis.

It quantifies the strength of a trend, which cannot be captured by directional indicators. While ADX and DMI are excellent for assessing trend strength and direction, they are not primarily designed to predict market reversals on their own. ADX can help indicate when a trend is weakening, which may precede a reversal, but it doesn’t specifically signal a reversal. DMI’s +DI and -DI crossovers can suggest potential entry and exit points, which might coincide with trend reversals. The ADX indicator is a vital tool for traders seeking to gauge trend strength. By combining it with other technical indicators and price action, traders can make well-informed decisions and optimize their strategies.

Now I will try to open a trade based on the information given in this review. I will find the beginning of a trend using ADX and enter the market. As soon as ADX rises above 20%, open a short Forex trading position as -DI is at the top. The stop-out level is the previous candle high, the yellow line.

Longer periods, like 20 or 25, make the ADX less sensitive and smoother, reducing whipsaws. They are more suited for longer-term trend analysis and position trading, but they will lag more significantly. The ADX behaves differently in different phases of the market and is crucial for adapting trading strategies accordingly. Let’s assume you’re trading Nvidia’s stock, which has been on an uptrend for several months on news of companies spending heavily on AI. The ADX rising above 25 confirms the validity of the breakout, indicating that a new, strong trend is likely forming.

The ADX is a combination of two other indicators developed by Wilder, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with a smoothed moving average. Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM). He has experience in technical analysis of financial markets, focusing on price action and fundamental analysis.

In the first scenario, the downtrend movement ended as soon as the index reached the 50th level. In the second scenario, the downtrend continued but gradually transitioned into a sideways movement. The reason why the ADX indicator is so popular is that it is very informative. You can download the Excel calculation template for the ADX Indicator here. All you need to do is enter the price data in columns B, C, and D. The EMA period (the number of candles used to calculate the indicator) can be set in the Index default settings.