Investing & Trading

Average Directional Index (ADX) Study

By Samantha Baltodano


TL;DR:

The Average Directional Index (ADX) is calculated as the average of the values from the directional index. It’s used to assess overall trend strength.


What Is the Average Directional Index (ADX) Study?

The Average Directional Index (ADX) is calculated as the moving average of the directional index (see Directional Movement Index). It’s used to help gauge the overall strength of a trend.


A high ADX indicates a strong trend. A low ADX value indicates the current trend is weakening and may experience reversion soon. 


More specifically, an ADX of 25 or higher suggests a strong trend. An ADX of 20 and below indicates no trend or trend weakening.


If after staying low for a lengthy time, the ADX rises by 4 or 5 units, (for example, from 15 to 20), it may be giving a signal to trade the current trend.


If the ADX is rising then the market is showing a strengthening trend. The value of the ADX is proportional to the slope of the trend. The slope of the ADX line is proportional to the acceleration of the price movement (changing trend slope). If the trend is a constant slope then the ADX value tends to flatten out.


Summary

  • ADX is the mean, or average, of the values of the DX over the specified Period.
  • ADX is used to gauge the overall strength of a trend.
  • An ADX of 25+ indicates a strong trend. An ADX of 20- indicates no trend or a weakening trend.



Average Directional Index (ADX) is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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