How To Use ADX Indicator (Average Directional Index)

What is the ADX Indicator?

The ADX (Average Directional Index) indicator is a technical analysis tool used to measure the strength of a trend. It is calculated by measuring the difference between two exponential moving averages (EMAs) of the positive and negative changes in price, and then smoothing the result using a moving average.

The ADX is plotted as a line on a separate window, with values typically ranging from 0 to 100. A high ADX value indicates a strong trend, while a low ADX value indicates a weak trend or range-bound market. Traders often use the ADX in conjunction with other indicators to confirm the strength of a trend and make trading decisions.

How does ADX indicator work?

The ADX indicator uses two lines, called the +DI and -DI, which stand for the positive directional indicator and the negative directional indicator, respectively. These lines are derived from the difference between two exponential moving averages (EMAs) of the underlying security's high and low prices.

The +DI line measures the strength of the upward trend and the -DI line measures the strength of the downward trend. The ADX line is then plotted as a third line, which is a moving average of the difference between the +DI and -DI lines.

The ADX line is used to determine the strength of a trend. If the ADX line is above 25, it is considered a strong trend, and if it is below 25, it is considered a weak trend or a non-trending market. Traders often use the ADX in conjunction with other indicators to confirm the strength of a trend and make trading decisions.

It's important to note that the ADX line alone does not indicate the direction of the trend, only the strength of the trend. Traders will often use the +DI and -DI lines to confirm the direction of the trend. When the +DI line is above the -DI line, it indicates an upward trend and when the -DI line is above the +DI line, it indicates a downward trend.

Is the ADX a good indicator?

The ADX indicator is a widely used and well-respected technical analysis tool that can be a useful addition to a trader's toolkit. It can provide valuable information about the strength of a trend, which can be useful in making trading decisions.

One of the main advantages of the ADX is that it is relatively simple to interpret and use. The ADX line is plotted on a separate window, and values typically range from 0 to 100. A high ADX value (above 25) indicates a strong trend, while a low ADX value (below 25) indicates a weak trend or range-bound market. This clear interpretation allows traders to quickly identify trending and non-trending markets, which can be useful in determining appropriate trading strategies.

However, it's important to note that the ADX indicator alone does not indicate the direction of the trend, only the strength of the trend. Traders will often use the +DI and -DI lines to confirm the direction of the trend. Also, it is not good to rely on one single indicator, but it's important to use it in conjunction with other indicators and analysis methods to gain a complete understanding of the market conditions.

Overall, the ADX can be a valuable tool for traders, but it should be used in conjunction with other indicators and analysis methods to gain a complete understanding of the market conditions.

What is the best setting for ADX indicator?

The best setting for the ADX indicator will vary depending on the trader's individual trading style and the specific market conditions. However, there are a few general guidelines that traders can follow when setting the ADX indicator.

The most commonly used settings for the ADX indicator are a 14-period EMA for both the +DI and -DI lines, and a 14-period EMA for the ADX line. This is the default setting for most charting software and is considered a good starting point for most traders.

However, some traders may prefer to use a different period for the moving averages, depending on the specific market conditions. For example, in a trending market, using a longer period for the moving averages may be more appropriate, while in a choppy market, using a shorter period may be more appropriate.

Another important consideration when setting the ADX indicator is the level at which the ADX line is considered to indicate a strong trend. The most commonly used level is 25, but some traders may prefer to use a different level, such as 20 or 30.

Ultimately, the best setting for the ADX indicator will depend on the trader's individual trading style and the specific market conditions. Traders should experiment with different settings to find the best setting that works for them and the market they are trading.

What are the 3 lines in ADX indicator?

The ADX indicator is composed of three lines:

The ADX line: This is the main line of the ADX indicator and represents the strength of a trend. It is calculated by measuring the difference between two exponential moving averages (EMAs) of the positive and negative changes in price, and then smoothing the result using a moving average.

The ADX line is plotted as a line on a separate window, with values typically ranging from 0 to 100. A high ADX value indicates a strong trend, while a low ADX value indicates a weak trend or range-bound market.

The +DI line (Positive Directional Indicator): This line measures the strength of the upward trend. It's calculated by comparing the current high price to the previous high price, and then smoothing the result using an EMA.

The -DI line (Negative Directional Indicator): This line measures the strength of the downward trend. It's calculated by comparing the current low price to the previous low price, and then smoothing the result using an EMA.

The +DI and -DI lines are used to confirm the direction of the trend, when the +DI line is above the -DI line, it indicates an upward trend and when the -DI line is above the +DI line, it indicates a downward trend. The ADX line, on the other hand, is used to determine the strength of a trend. If the ADX line is above 25, it is considered a strong trend, and if it is below 25, it is considered a weak trend or a non-trending market.

How to Trade Using ADX (ADX Trading Strategy)

There are several ways to trade using the ADX indicator, but one of the most common strategies is to use the ADX as a filter for other trading strategies.

When the ADX line is above 25, it indicates a strong trend and traders can look to enter trades in the direction of the trend. When the ADX line is below 25, it indicates a weak trend or non-trending market, and traders may want to avoid taking any trades or look for other opportunities.


Here's an example of a basic ADX trading strategy:

Identify the trend: Use the +DI and -DI lines to confirm the direction of the trend. When the +DI line is above the -DI line, it indicates an upward trend and when the -DI line is above the +DI line, it indicates a downward trend.

Confirm trend strength: Use the ADX line to confirm the strength of the trend. If the ADX line is above 25, it indicates a strong trend and traders can look to enter trades in the direction of the trend.

Enter trades: Once the trend and trend strength have been confirmed, traders can look to enter trades in the direction of the trend using other trading strategies, such as a moving average crossover or a break of a key level of support or resistance.

Use stop-loss: Traders should always use stop-loss orders to limit their risk. This can be placed just below the key level of support or resistance that was broken.

Take profits: Traders should also set profit targets for their trades, based on the strength of the trend and other market conditions.

It's important to note that this is just an example of one possible strategy and that traders should always use their own discretion and consider their own risk tolerance when implementing any trading strategy.

READ MORE: The Ultimate Guide to Decentralized Exchanges (DEXs)