The average directional index (ADX) is a technical indicator used for determining the trend’s strength and direction. The indicator is comprised of three lines: the ADX, DI+, and DI-. When used together, the indicator shows the trend direction and magnitude over a period of time (14 days is the default).
How to read the Average Directional Index (ADX)
Learning how to read and use the ADX is straightforward. When the +DI is above the -DI, prices are moving up, with the ADX line (in blue) will show you the extent of the uptrend. When prices are moving down, the -DI will be above the +DI, and the ADX again will show you the extent of the downtrend.
Reading the ADX Line
The strength of the trend can be solely measured by the ADX as follows.
- 0-25 Weak trend
- 25-50 Strong trend
- 50-75 Very strong trend
- 75-100 Exceptionally strong trend
Note that strong ADX readings indicate that prices are moving in the same direction as the main trend.
Another application of the ADX line is that it can be used as a momentum indicator. Thus, when the line turns up and makes progressively higher peaks, then momentum is increasing. When the ADX turns down and makes lower lows, momentum is decreasing.
The final way that the ADX can help you trade is by more easily spotting divergences in the current trend. Divergences lay in a change of momentum that can foreshadow a reversal to either to upside or downside.
When the price makes a higher high and the ADX makes a lower high, this is a negative divergence; the same can apply at market bottoms when price makes a lower high and the ADX makes a higher high.
Although divergences are not guarantees that the trend will change direction, it is a strong signal that momentum is about to change direction.