21. ADX Average Directional Index
• The Average Directional Movement Index (ADX) technical
analysis indicator describes when a market is trending or not
trending. When combined with the DMI+ plus and DMI- minus
(see: DMI) the ADX can generate buy and sell signals.
• However, the main purpose of the ADX is to determine
whether a stock, future, or currency pair is trending or is in a
trading range. Determining which mode a market is in is helpful
because it can guide a trader to which other technical analysis
indicators to use.
22. ADX Shows Trend Strength
The first concept to remember is that the direction that the ADX moves
doesn't depend upon the direction of the underlying stock. All the ADX
shows is the trend strength.
• Strong upward trend of stock = Increasing ADX
• Strong downward trend = Increasing ADX
The ADX is an oscillator that fluctuates between 0 and 100,
although readings above 60 are relatively rare. In technical analysis, an
ADX is compared to two levels:
• ADX readings below 20 indicate a weak trend
• ADX readings above 40 indicate a strong trend.