Average Directional Index (ADX)

Name Type Prerequisite Use Cases
Average Directional Index (ADX) Trend EMA Determining if a market is trending or ranging (values > 25).

Definition

The Average Directional Index (ADX) is used to quantify the strength of a trend. ADX stands for Average Directional Movement Index and is used to measure the overall strength of a trend. The ADX indicator is an average of expanding price range values.

Mathematical Equation

\[ +DI = 100 \times \frac{\text{EMA}(+DM)}{\text{ATR}} \]
\[ -DI = 100 \times \frac{\text{EMA}(-DM)}{\text{ATR}} \]
\[ DX = 100 \times \frac{|(+DI) - (-DI)|}{(+DI) + (-DI)} \]
\[ ADX = \text{EMA}(DX) \]

Special cases

  • Maximum possible value: 100
  • Minimum possible value: 0
  • Behavior: Oscillates independently between 0 and 100 to indicate the strength of a trend, not the direction.

Visualization

ADX

Trading Significance

  1. Trend Strength: ADX > 25 indicates a strong trend (either up or down). ADX < 20 indicates a weak or non-existent trend.

  2. Direction: If +DI > -DI, trend is bullish. If -DI > +DI, trend is bearish.