Average Directional Movement Index (ADX)
Average Directional Movement Index (ADX) or often also called the Average Directional Index developed by J. Welles Wilder Jr. This indicator is used to determine the strength of a trend. It is important to know whether a market is trending or sideways to provide optimal trading results.
ADX is an oscillator type indicator that has a value between 0 and 100. Although the range of values ranges from 0 to 100, in many cases ADX values above 60 are very rare.
A value below 10 indicates a weak trend (the market is sideways), while a value above 40 indicates a strong trend. It should be noted, that ADX does not indicate the direction of price movements (up or down), but only to measure a trend strength. For example, the ADX value above 40, could indicate a strong bullish or bearish market.
ADX can also be used to find out major changes from sideways to the formation of new trends or vice versa. For example if ADX changes from below level 20 to above 20, there are indications that sideways conditions have changed and a trend is starting to form.
Conversely, if ADX turns weaker from above 40 and below level 40, it indicates that the current trend has weakened and sideways conditions may be formed.
ADX uses standard parameters with period 14. According to standard period technical analysts this is good enough for various trading situations. So you just use the standard parameters.
On some trading platforms, you will also see two other lines, namely Positive Directional Indicator (+ DI) and Negative Directional Indicator (-DI). Our advice, you just pay attention to the ADX line, ignore the two lines. You might be confused if you have to observe the two lines.
Tips for using ADX
- ADX does not generate sell or buy signals. Therefore, do not ever use ADX as a buy or sell signal.
- Use ADX to determine when to open a position.
- If ADX is between 0-20, don’t open the position. At that time the market was sideways. Prices only fluctuate in a narrow range.
- If ADX is above 20, you can see the beginning of the trend. You can start entering now (bullish or bearish). Enjoy the trend.
- Hold position as long as the trend continues. Usually the trend lasts until ADX reaches above 40-50. After ADX reaches that value, immediately close the position.
Especially for stocks, ADX can also be used as a selection tool. Traders or investors always want to choose stocks that are moving.