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Assessing Trends with Average Directional Index (ADX)

Learn how average directional index (ADX) can help identify trends and their strength or weakness.

The Average Directional Index (ADX) helps traders assess the strength of an existing trend, warn when that trend may be weakening, and highlight times when no clear trend exists.

Indicator type

Market conditions

The Average Directional Index (ADX) is comprised of several components. These indicators are most effective when used in the following market conditions:

Average Directional Index (ADX) components

The Average Directional Index uses the entire price action in a given period, from low to high, to measure the strength and persistency with which a security moves up or down. It is displayed on a scale from 0 to 100 and is designed to rise when a trend is strengthening and to decline when a trend is weakening. This holds true, regardless of the direction of the trend.

The components of the Average Directional Index appear differently across charting services. The primary lines provided for this group include:

  • DI+ - Measures the percentage of positive movement
  • DI- - Measures the percentage of negative movement
  • DX - Measures the absolute value of difference between DI+ and DI-
  • ADX - Moving average of DX

A common chart combination for this indicator is DI+, DI-, and ADX.

Indicator signals: What traders look for

Traders look at the level of ADX and for DI+ and DI- "crossovers" for indications to the trend's strength and potential changes in trend.

DI crossover (trend reversal)

There are two types of DI crossovers. When the DI+ line crosses above the DI- line it signals a potential change of trend to the upside. When the DI+ line crosses below the DI- line it signals a potential change of trend to the downside. 

ADX crossovers (trend strength or trend weakness) 

When the ADX line crosses above or below a particular level it is believed to signal a potential change in trend strength. In basic terms, the higher the ADX reading the stronger the security is considered to be trending (whether up or down). The lower the ADX reading the greater the lack of a meaningful trend.

Bullish signals

As an early warning signal for a downtrend reversal or at the beginning of an uptrend:

  • DI+ will begin to go up as price goes up, indicating an increase in positive price movement.
  • ADX may be falling or at a low level.

As the trend continues:

  • DI+ will continue to go up and will eventually cross over DI- which will stay flat or fall. This is an indication that positive price movement is outpacing negative price movement and the trend is gaining strength.
  • ADX is going up, a further indication that the trend is gaining strength.

ADX bullish trend strength indication guidelines

When DI+ line is above the DI- line and the ADX line crosses above or below a particular level it is believed to signal a potential bullish trend strength indicator. 

 

Bearish signals

As an early warning signal for an uptrend reversal or at the beginning of a downtrend:

  • DI- will begin to go up as price goes down, indicating an increase in negative price movement.
  • ADX may be falling or low.

As the trend continues: 

  • DI- will continue to go up and will eventually cross over DI+ which will stay flat or fall. This is an indication that negative price movement is outpacing positive price movement and the trend is gaining strength.
  • ADX is going up, a further indication that the trend is gaining strength.  

ADX bearish trend strength indication guidelines

When DI+ line is below the DI- line and the ADX line crosses above or below a particular level it is believed to signal a potential bearish trend strength indicator. 

 

Summary

The use of ADX and its other related indicators gives traders a method to help them identify the trend for a given stock or asset as well as the relative strength or weakness of that trend.

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