ADX stands for Average Directional Movement Index and can be used to help measure the overall strength of a trend. The ADX indicator is an average of expanding price range values. The ADX is a component of the Directional Movement System developed by Welles Wilder. This system attempts to measure the strength of price movement in positive and negative direction using the DMI+ and DMI- indicators along with the ADX.
How this indicator works
- Wilder suggests that a strong trend is present when ADX is above 25 and no trend is present when below 20.
- When the ADX turns down from high values, then the trend may be ending. You may want to do additional research to determine if closing open positions is appropriate for you.
- If the ADX is declining, it could be an indication that the market is becoming less directional, and the current trend is weakening. You may want to avoid trading trend systems as the trend changes.
- If after staying low for a lengthy time, the ADX rises by 4 or 5 units, (for example, from 15 to 20), it may be giving a signal to trade the current trend.
- If the ADX is rising then the market is showing a strengthening trend. The value of the ADX is proportional to the slope of the trend. The slope of the ADX line is proportional to the acceleration of the price movement (changing trend slope). If the trend is a constant slope then the ADX value tends to flatten out.
ADX is simply the mean, or average, of the values of the DX over the specified Period.