Whether you’re trading stocks, futures, forex, or cryptocurrencies, you’ve probably heard people talking about market trends. But the question is: how strong is a trend, exactly? Is there an indicator that can quantify the strength of a trend?
The answer is yes—and that’s what we’re covering today: the ADX indicator (Average Directional Index). Simply put, the ADX doesn’t tell you whether the market is going up or down—it tells you how strong the current trend is. Think of it like climbing a mountain: the ADX won’t tell you which direction you’re heading, but it will tell you how steep the slope is. Whether you’re in a bull or bear market, the ADX can help you determine whether the market is in a strong trend.
Origins of the ADX
We can’t talk about the ADX without mentioning its creator: Welles Wilder. He’s a legendary figure in technical analysis, also known for inventing the famous RSI (Relative Strength Index). Wilder introduced the ADX in 1978 with the goal of helping traders better gauge the strength of market trends. His idea was simple: to give the market a clear signal to let traders know when to enter and when to stay on the sidelines.
In fact, ADX isn’t a standalone indicator—it’s part of the DMI system (Directional Movement Index). The DMI system includes two key components: +DI and -DI, which represent upward and downward market momentum, respectively. The ADX combines these two to provide a single value that reflects the overall trend strength. Rather than just relying on price changes, ADX gives you a deeper view into the market’s trend dynamics.
How the ADX Is Calculated
As with other technical indicators, the best way to understand the ADX is to learn how it’s calculated. The key components are +DI and -DI.
+DI and -DI
+DI (positive directional movement) and -DI (negative directional movement) are used to measure momentum in two directions. They’re calculated by comparing today’s highs and lows to those of the previous day to see which direction had the greater move.
- If today’s high is significantly higher than yesterday’s high, the market shows strong upward momentum—this is +DI.
- If today’s low is much lower than yesterday’s low, it suggests strong downward momentum—this is -DI.
Though the formulas can seem complex, the core idea is simple: is the market leaning more toward rising or falling?
Step 1: Calculating +DM and -DM
Let’s walk through an example using a stock’s high and low prices over a week:
| Day | High | Low |
|---|---|---|
| Mon | 100 | 95 |
| Tue | 102 | 96 |
| Wed | 103 | 97 |
| Thu | 101 | 95 |
| Fri | 104 | 99 |
From Monday to Tuesday:
- +DM = 102 – 100 = 2
- -DM = 96 – 95 = 1
Tuesday to Wednesday:
- +DM = 103 – 102 = 1
- -DM = 97 – 96 = 1
Wednesday to Thursday:
- +DM = 101 – 103 = 0 (negative values are discarded)
- -DM = 97 – 95 = 0
Thursday to Friday:
- +DM = 104 – 101 = 3
- -DM = 99 – 95 = 0
Step 2: Calculating +DI and -DI
+DI and -DI are normalized using the formula:
- +DI = (+DM / True Range) × 100
- -DI = (-DM / True Range) × 100
We first need to calculate the True Range (TR). It’s the largest of these three:
- Today’s high – low
- Today’s high – yesterday’s close
- Yesterday’s close – today’s low
(All taken in absolute value)
True Range Examples:
Tuesday:
- High – Low = 102 – 96 = 6
- High – Prev Close = 102 – 95 = 7
- Prev Close – Low = 95 – 96 = 1
→ TR = 7
Wednesday: TR = 6
Thursday: TR = 8
Friday: TR = 9
Step 3: Calculating +DI and -DI values:
Tuesday:
- +DI = (2 / 7) × 100 ≈ 28.57
- -DI = (1 / 7) × 100 ≈ 14.29
Wednesday:
- +DI = (1 / 6) × 100 ≈ 16.67
- -DI = (1 / 6) × 100 ≈ 16.67
Thursday:
- +DI = 0
- -DI = 0
Friday:
- +DI = (3 / 9) × 100 ≈ 33.33
- -DI = 0
Step 4: Calculating DX
Formula:
DX = (|+DI – -DI| / (+DI + -DI)) × 100
Tuesday: DX ≈ 33.33
Wednesday: DX = 0
Thursday: DX = 0
Friday: DX = 100
Step 5: Calculating ADX
The ADX is a smoothed average of DX values, typically using a 14-period average. For simplicity, we’ll use a basic average in this example:
- Tuesday: ADX = 33.33 (initial value)
- Wednesday: (33.33 + 0) / 2 = 16.67
- Thursday: (16.67 + 0) / 2 = 8.34
- Friday: (8.34 + 100) / 2 = 54.17
Summary Table:
| Day | High | Low | +DM | -DM | TR | +DI | -DI | DX | ADX |
|---|---|---|---|---|---|---|---|---|---|
| Mon | 100 | 95 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Tue | 102 | 96 | 2 | 1 | 7 | 28.57 | 14.29 | 33.33 | 33.33 |
| Wed | 103 | 97 | 1 | 1 | 6 | 16.67 | 16.67 | 0 | 16.67 |
| Thu | 101 | 95 | 0 | 0 | 8 | 0 | 0 | 0 | 8.34 |
| Fri | 104 | 99 | 3 | 0 | 9 | 33.33 | 0 | 100 | 54.17 |
Interpreting the ADX: Momentum vs. Reversal
As mentioned earlier, the ADX tells you how strong the market trend is. Think of it like a volume knob—the higher the value, the louder the “trend strength.” Here’s what different ADX values typically indicate:
- ADX < 20: No significant trend. The market is likely in a range or sideways movement, making it hard to find clear entry or exit points.
- ADX 20–40: Moderate trend strength. The market is starting to move directionally, offering early opportunities for trend traders.
- ADX 40–60: Strong trend. Whether up or down, the trend has momentum. Traders often follow these trends more actively.
- ADX > 60: Extremely strong trend. The market may be in a one-sided, parabolic move. While tempting, this often comes with risk of sharp reversals or corrections.
Additional Signals:
- Rising ADX: Indicates a strengthening trend, regardless of direction. This could be a bullish or bearish signal, but it tells you momentum is building.
- Falling ADX: Indicates weakening trend strength. Even if the ADX is still high, a falling ADX suggests that the market’s momentum may be slowing down, possibly leading to consolidation or reversal.
