What Is the ADX Indicator and How Do You Read It?
The Average Directional Index, or ADX, is a technical indicator that measures how strong a trend is, on a scale of 0 to 100. It does not tell you whether price is going up or down, only how strong the current trend is, whichever direction it happens to be moving.
This makes ADX a bit different from most indicators beginners learn first. Tools like moving averages or RSI try to tell you direction. ADX instead answers a separate, equally important question: is this market actually trending, or is it just drifting sideways with no real conviction?
Who Created the ADX Indicator?
Welles Wilder introduced the ADX in his 1978 book “New Concepts in Technical Trading Systems,” the same book that introduced RSI and ATR. He designed it to help traders avoid using trend-following strategies in markets that weren’t actually trending, since those strategies tend to perform poorly during sideways, choppy price action.
How Is ADX Calculated?
The full calculation is fairly involved, and you’ll never need to do it by hand since every charting platform plots it automatically. But understanding the building blocks helps make sense of what you’re looking at.
ADX is built from two other lines, called the Directional Indicators:
- +DI (Positive Directional Indicator): Measures upward price movement strength.
- −DI (Negative Directional Indicator): Measures downward price movement strength.
These two lines are calculated by comparing how much of each period’s price range extended beyond the prior period’s range, in the up direction versus the down direction. The ADX line itself is then derived by smoothing the difference between +DI and −DI over a set period, typically 14 days, and converting it into a single trend-strength value between 0 and 100.
Most charts show all three lines together: ADX, +DI, and −DI.
Reading the ADX Scale
The ADX line itself ranges from 0 to 100, though readings above 60 are fairly rare in practice. Here’s a general guide to interpreting it:
| ADX Reading | What It Suggests |
|---|---|
| 0 to 20 | Weak or absent trend, market likely ranging |
| 20 to 25 | Trend may be starting to develop |
| 25 to 50 | Strong trend |
| 50 to 75 | Very strong trend |
| 75 to 100 | Extremely strong trend (uncommon) |
Many traders use 25 as a rough dividing line: below 25, they treat the market as range-bound and avoid trend-following strategies; above 25, they treat it as trending and look for trades in the trend’s direction.
Using +DI and −DI for Direction
Since ADX alone doesn’t show direction, traders pair it with the +DI and −DI lines to figure out which way the trend is pointing:
- When +DI is above −DI, the trend is generally considered bullish (upward).
- When −DI is above +DI, the trend is generally considered bearish (downward).
- A crossover, where +DI crosses above or below −DI, is sometimes used as a trade signal, especially when ADX is also rising, confirming the new trend has strength behind it.
How Do Traders Use ADX?
Filtering Out Choppy Markets
The most common use of ADX is as a filter. Before applying a trend-following strategy, like buying on a moving average crossover, a trader might first check whether ADX is above 25. If it is, the strategy is more likely to work well. If it’s below 20, the trader might sit out or switch to a range-trading approach instead.
Confirming Trend Strength
A rising ADX line suggests the current trend, up or down, is gaining strength. A falling ADX line suggests the trend is losing steam, even if price is still moving in the same direction. This can be an early warning that a trend is due for a pause or reversal.
Spotting Early Trend Development
When ADX rises from below 20 to above 25, it can signal that a new trend is forming after a period of sideways movement. Some traders watch for this shift as an early opportunity to enter a developing trend.
ADX vs. Other Momentum Indicators
Beginners sometimes confuse ADX with momentum indicators like RSI or the stochastic oscillator, since all three are plotted on a bounded scale. The key difference is what they measure. RSI and the stochastic oscillator try to identify overbought and oversold conditions tied to price direction. ADX ignores direction entirely and focuses purely on trend strength. In practice, many traders use ADX alongside a directional tool, since the two answer different but complementary questions.
Limitations of ADX
- No directional information on its own: You need +DI and −DI, or another tool, to know which way the trend is pointing.
- Lagging by nature: Since it’s built from smoothed, averaged data, ADX tends to confirm a trend after it’s already underway rather than predicting it in advance.
- Can stay elevated after a trend has peaked: A high ADX reading doesn’t guarantee the trend will continue; it only confirms the trend has been strong recently.
Key Takeaways
- ADX measures the strength of a trend on a 0 to 100 scale, regardless of direction.
- Readings below 20 generally suggest a weak or absent trend; readings above 25 generally suggest a strong one.
- The +DI and −DI lines, plotted alongside ADX, show which direction the trend is pointing.
- Rising ADX suggests a strengthening trend; falling ADX suggests a weakening one.
- ADX works best as a filter for trend-following strategies, helping traders avoid choppy, range-bound conditions.
FAQ
What is a good ADX value for trading?
Many traders treat readings above 25 as confirmation of a tradeable trend, while readings below 20 suggest sitting out trend-following strategies. These are general guidelines, not strict rules.
Can ADX predict a trend reversal?
Not directly. ADX shows trend strength, not direction changes. However, a falling ADX after a strong trend can hint that momentum is fading, which sometimes precedes a reversal.
Is ADX useful for day trading?
Yes, many day traders apply ADX on shorter time frames to judge whether intraday price action is trending strongly enough to justify a trend-following approach that day.
What’s the difference between ADX and DMI?
DMI, or the Directional Movement Index, refers to the full system Wilder created, which includes +DI, −DI, and ADX together. ADX is technically just one part of the broader DMI system, though it’s often discussed on its own.
Does a low ADX mean I shouldn’t trade at all?
Not necessarily. A low ADX suggests trend-following strategies may struggle, but some traders switch to range-trading approaches, like buying near support and selling near resistance, during these periods instead.
