Education / Indicators / Average Directional Moving Index

The ADX is a momentum indicator that tries to measure the strength of the trend in attempt to determine is the market trend or it's in sideway movement. The ADX is so popular because determining whether a stock, commodity, or currency market is trending or not trending can help a trader avoid the pitfalls of some indicators.

The ADX indicator indicates the strength of the trend without telling you the direction of the trend (upward or downward). All the ADX shows is the trend strength.

• Strong upward trend of stock, future, or currency = Increasing ADX
• Strong downward trend = Increasing ADX

Although the ADX fluctuates from 0 to 100 it's rarely to score values above 6o. You can use the reading of the ADX with you trend trading as the following:
Readings above 40 indicate the strength of the trend. The same when the ADX moves below 40 to above 40 trend strength is excepted.

Calculation

The ADX based on comparison of another two directional indicators developed by Wilder; Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI) to produce ADX as showed in the following formula:

ADX = SUM[(+DI-(-DI))/(+DI+(-DI)), N]/N

where:
N: The period of calculation.