Average Directional Index (ADX)
Overview
The Average Directional Index quantifies trend strength on a scale from 0 to 100, regardless of direction. Developed by J. Welles Wilder, ADX is derived from two directional movement indicators (+DI and -DI) that measure bullish and bearish pressure respectively. A rising ADX above 25 signals a strengthening trend, while ADX below 20 indicates a ranging or trendless market — making it an invaluable filter for choosing between trend and range strategies.
Key Concepts
ADX measures trend strength, not direction. +DI measures bullish directional movement; -DI measures bearish directional movement. ADX above 25: trending market. ADX below 20: ranging/trendless market. Rising ADX: trend is strengthening. Falling ADX: trend is weakening (not necessarily reversing).
Entry Signals
Enter trend-following trades when ADX is above 25 and rising, confirming a strong trend environment. Go long when +DI crosses above -DI with ADX above 20 and rising. Go short when -DI crosses above +DI with ADX above 20 and rising. Use ADX below 20 as a filter to switch to range-trading strategies instead of trend-following.
Exit Signals
Exit trend trades when ADX peaks and begins declining from elevated levels, suggesting the trend is losing steam. Take profits on DI crossovers against your position while ADX is still elevated. Close positions when ADX drops below 20, indicating the trend environment has ended. Trail stops while ADX remains above 25 and rising.
Best Timeframes
1H, 4H, Daily
Pro Tips
ADX is most powerful as a regime filter — use it to determine whether you should apply trend-following or range-trading strategies, rather than as a standalone entry signal. A common mistake is interpreting falling ADX as a trend reversal; it simply means the trend is weakening, which could lead to a range, not necessarily a move in the opposite direction. DI crossovers above ADX 20 produce far better results than crossovers in low-ADX environments.
More Topics in This Category
Ichimoku Cloud
The Ichimoku Kinko Hyo (Ichimoku Cloud) is a comprehensive indicator system that defines support and resistance, identifies trend direction, gauges momentum, and generates trading signals — all in a single glance. Developed by Goichi Hosoda, the system consists of five lines and a shaded cloud (Kumo) that projects into the future, providing a uniquely forward-looking view of market equilibrium.
Average True Range (ATR)
Average True Range measures market volatility by calculating the average range of price movement over a specified period, accounting for gaps. Developed by J. Welles Wilder, ATR does not indicate direction — it quantifies how much an asset typically moves, making it essential for position sizing, stop-loss placement, and volatility-based trade management. Rising ATR indicates increasing volatility; falling ATR signals contracting volatility.
Commodity Channel Index (CCI)
The Commodity Channel Index measures an asset's deviation from its statistical mean price, oscillating around a zero line with no fixed upper or lower bound. Originally designed for commodities by Donald Lambert, CCI is effective across all markets. Readings above +100 indicate strong bullish momentum (potential overbought), while readings below -100 signal strong bearish momentum (potential oversold).
Vortex Indicator
The Vortex Indicator consists of two oscillating lines — VI+ (positive trend movement) and VI- (negative trend movement) — that capture the directional movement of price through the relationship between the current high and prior low, and the current low and prior high. Crossovers between these lines signal trend changes and provide entry and exit timing for trend-following strategies across any market.