Average Directional Index (ADX)
Definition
ADX measures the strength of a trend regardless of its direction. It does not tell you whether a stock is going up or down — only whether it is trending strongly or moving sideways. It runs from 0 to 100 and is typically calculated over 14 periods.
Formula
+DI = 100 x Smoothed +DM / Average True Range (ATR)
-DI = 100 x Smoothed -DM / ATR
DX = 100 x |+DI - -DI| / (+DI + -DI)
ADX = 14-period smoothed average of DX
+DM (positive directional movement) = Current High - Previous High (if positive and greater than -DM, else 0)
-DM (negative directional movement) = Previous Low - Current Low (if positive and greater than +DM, else 0)How to Interpret It
ADX below 20 means the stock is not trending — it is moving sideways or chopping around. ADX above 25 means a trend is present. Above 40 is a strong trend, and above 50 is a very strong trend.
The direction of the trend comes from the two directional indicators (+DI and -DI) that are calculated alongside ADX. When +DI is above -DI, the trend is up. When -DI is above +DI, the trend is down.
A rising ADX means the trend (whichever direction it is) is getting stronger. A falling ADX means it is weakening. ADX can be falling even while the price keeps going up — it just means the uptrend is losing conviction.
Typical Strategy
ADX is primarily used as a filter rather than a standalone signal. Trend-following strategies (using moving average crossovers, for example) work better when ADX is above 25, confirming that a real trend exists. When ADX is below 20, you might switch to range-bound strategies or simply stay out.
A more specific setup combines ADX with the directional indicators: buy when +DI crosses above -DI and ADX is above 25. This gives you both a direction and confirmation that the trend has enough strength behind it.