Average Directional Index

A technical analysis indicator used to determine the strength of a price trend, ranging from 0 to 100.

The Average Directional Index (ADX) is a technical analysis indicator used to quantify the strength of a price trend, regardless of its direction. It is plotted as a single line with values ranging from 0 to 100. Because it is non-directional, a rising ADX simply means the market is trending strongly, whether that trend is upward or downward. Conversely, a falling ADX indicates that the trend is weakening or that the market is entering a sideways, range-bound phase. To calculate the ADX, traders first determine the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI), which measure upward and downward price movement over a set period (typically 14 days). The ADX itself is a smoothed moving average of the absolute difference between +DI and -DI. While the +DI and -DI lines show which direction has momentum, the ADX line itself only measures the intensity of that momentum. Investors and traders use the ADX to determine whether they should employ trend-following strategies or range-bound strategies. ADX values below 20 generally suggest a weak trend or a consolidating market, where breakout strategies are prone to failure. Values above 25 suggest a strong trend is forming, while values above 40 indicate an extremely strong trend. A common pitfall is assuming a falling ADX means the price is reversing; in reality, a falling ADX simply means the current trend is losing momentum, not necessarily that a trend reversal has begun.

A stock's 14-day Positive Directional Indicator (+DI) is 32 and its Negative Directional Indicator (-DI) is 12. The difference between them is 20, and their sum is 44. The Directional Movement Index (DX) is calculated as (20 / 44) 100 = 45.45. If the smoothed moving average of these DX values over the last 14 periods is calculated, the resulting ADX value is 42. This high ADX value indicates that the stock is in an extremely strong trend.