In today’s lesson, we’re going to learn about the average directional index, or ADX for short; an indicator which helps traders determine whether the market is trending or not, how strong that trend is and whether the market may be switching from a trend to range or vice versa. So let’s get started.
Here’s what the ADX indicator looks like when it’s plotted on a chart. As you can see, it’s made up of three lines.
But what I feel is important to know is that the ADX line is composed of the two other indicators which are known as the positive directional index or +DI line for short, and the negative directional index which is the -DI line for short.
Here’s the ADX line in black, the -DI line in red and the +DI line in green. The +DI line is representative of how strong or weak the uptrend in the market is. Or another way of saying that would be how strong or weak the buyers in the market are.
The -DI line is representative of how strong or weak the downtrend in the market is. Or another way of saying that obviously is how strong or weak the sellers in the market are.
As the ADX line is comprised of both the +DI line and the -DI line, it doesn’t indicate whether the trend is up or down, but simply the strength of the overall trend in the market.
One of the unique things and one of the reasons why I really like this indicator is it paints a really nice picture of both the buying pressure and the selling pressure as two different lines, and then gives you one line which gives the overall strength of the underlying trend.
When the ADX line is above 40 and rising, this is indicative of a strong trend. And when the ADX line is below 20 and falling, this is indicative of a ranging market.
So you can see here it’s below 20 and the market is ranging there, and there it’s above 40 and the market is trending strongly.
And some people will put that, just for your knowledge, some people will put that 40 number at 30 for the strong trend. Some people will say you can start looking to trade trends above 25. There’s a lot of debate as to what’s the best number to use there.
But anyway, one of the first ways that traders will use the ADX in their trading is as a confirmation of whether or not a financial instrument is trending and to avoid choppy periods in the market
In this lesson we are going to learn about the Average directional Index (ADX), an indicator which helps traders determine when the market is trending, when the market is ranging, when the market may be about to change from trending to ranging or vice versa, and to gauge the strength of the trend in the market. When plotted below the chart the ADX Line is normally accompanied by two other lines which are known as the +DI and -DI Lines.