Most indicators try to answer "is the price going up or down?". The ADX (Average Directional Index) answers a different and very useful question: is there a trend at all, and how strong is it? That makes it a natural companion for any strategy that follows trends.
What the ADX measures
The ADX measures the strength of a trend, not its direction. It moves on a scale from 0 to 100:
- A low ADX means the price is moving without a clear direction: a sideways, choppy market.
- A high ADX means the price is moving consistently in one direction, whichever it is.
This is the point most often misunderstood: a rising ADX can come with a strong rise or with a strong fall. The ADX alone never tells you which.
Where it comes from: +DI and -DI
J. Welles Wilder introduced the ADX in 1978, together with two companion lines:
- +DI (positive directional indicator): measures how much the price has been pushing to new highs above the previous session.
- -DI (negative directional indicator): measures how much it has been pushing to new lows below the previous session.
Both are averaged over a period (14 sessions in the classic setting) and expressed relative to the stock's volatility (its ATR). The ADX is then an average of the difference between the two, relative to their sum: when one clearly dominates the other, the ADX rises.
The direction is read from the two companion lines:
What 20 and 25 mean
Classic guides use fixed levels:
- Below 20: no meaningful trend.
- Above 25: a trend is present.
- Above 40: a very strong trend.
They are a reasonable starting point, but they have a problem: each stock has its own normal. A large, stable company may rarely reach 30, while a volatile growth stock spends long periods above it. A fixed threshold calls the first "trendless" too often and the second "trending" too easily.
A more robust approach is to compare the ADX with the stock's own history: is it high compared with what is usual for this stock?
- 1No clear direction: the ADX is below 20 even though the price moves.
- 2Trend: the ADX is above 25 and +DI is above −DI, so the trend is up.
Common uses
1. As a filter for trend strategies. A trend-following rule works better when there is a trend to follow. Requiring a high ADX avoids buying "breakouts" in sideways markets, where they fail most.
2. To choose the type of strategy. A low ADX suggests a market that oscillates, where rebound strategies tend to fit better; a high ADX suggests a market that moves, where trend strategies fit better. We explain the two ideas in Mean Reversion vs Trend Following.
3. To watch a trend lose steam. An ADX that turns down after a long climb can indicate that the trend is tiring, even if the price is still rising.
How we use the ADX at InbestPlanners
1. In the Impulse momentum rule. One of the two ways an Impulse signal can arise requires the stock's ADX to be above its own usual high, measured against that stock's history rather than a fixed number, together with a well-ordered structure: the close above a fast exponential average (21 sessions), and that average above the 200-session one. The ADX says the move is strong; the averages say it is going up.
2. In the technical ranking. The technical ranking and the 360 Analysis combine the position of the price against its moving averages with the ADX to describe how strong and established the trend is.
3. In the model. The ADX is one of the trend variables that our Conviction Score takes into account. The full list is on the methodology page.
Three common mistakes
1. Reading a high ADX as bullish. It only says the move is strong. Look at +DI and -DI, or at the moving averages, for the direction.
2. Using one threshold for every stock. What is high for one company is ordinary for another.
3. Expecting it to be early. The ADX is built from averages of averages, so it confirms trends that have already started. Its value is in filtering, not in anticipating.
In short
- The ADX measures how strong a trend is, from 0 to 100, not where it is going.
- +DI and -DI give the direction.
- Classic levels (20, 25, 40) are a guide; comparing with the stock's own history is more robust.
- It is most useful as a filter: only follow trends where there is a trend.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.