What is the Average Directional Index (ADX) Indicator?
The Average Directional Index (ADX) is a trend-strength indicator from J. Welles Wilder that measures how strong a market is trending without indicating whether the trend is up or down. It is plotted in a separate panel as a line on a 0–100 scale, commonly alongside the +DI and -DI lines from the Directional Movement Index (DMI). Traders typically read ADX below 20 as weak or range-bound conditions and ADX above 25 as a stronger trend environment.
How is the Average Directional Index (ADX) Indicator Calculated?
The ADX is calculated from the DMI by converting directional movement into +DI and -DI, turning their separation into a Directional Index (DX), then smoothing DX with Wilder’s method. The standard lookback is 14 periods.
Directional Movement: +DM = current high − prior high (if it exceeds the down move, else 0); -DM = prior low − current low (if it exceeds the up move, else 0).
True Range (TR) = max(high − low, |high − prior close|, |low − prior close|).
Wilder-smooth +DM, -DM, and TR over N periods (default N = 14), then compute +DI = (smoothed +DM / smoothed TR) × 100 and -DI = (smoothed -DM / smoothed TR) × 100.
DX = |(+DI − -DI) / (+DI + -DI)| × 100.
ADX = Wilder-smoothed DX (the first ADX is typically the average of the first N DX values, then smoothed forward).
How to Use the Average Directional Index (ADX) Indicator in Trading?
To use ADX in trading, treat it as a market-regime filter: trade trend setups when ADX is rising and above a threshold, and avoid trend signals when ADX is low and flat. ADX rising proves directional movement is expanding; ADX falling shows the trend is losing force even if price still drifts.
Trend filter: Focus on breakouts, pullbacks, and continuation trades when ADX is above 25; prioritize range tactics or stand aside when ADX is below 20.
Direction with DMI: Take long bias when +DI is above -DI and ADX is above 25; take short bias when -DI is above +DI and ADX is above 25.
Breakout confirmation: A range break that coincides with ADX lifting from low levels and pushing above 25 signals real follow-through instead of a stop-run.
Exit/management cue: When ADX rolls over after a run, tighten risk or take partials because the move is losing participation.