Average Directional Index ADX Definition & Examples

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adx meaning

It’s important to remember that the ADX indicator doesn’t tell you what direction an investment’s price is moving. The ADX just tells you how strongly that investment is moving in a particular direction—whether it’s up or down. For example, if a stock’s https://www.bigshotrading.info/ price is rising, the ADX can give you an idea whether or not it’s likely to continue rising or if it’s about to start dropping. Like most indicators, it works best when paired with highly functioning data processors and other analytical tools.

Secondly, to determine the trend’s strength in a trending market. Finally, it is also often used, as other momentum indicators are, to indicate a potential market reversal or trend change. The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus Directional Movement (-DM) getting the edge.

Example of How to Use Wilder’s DMI (ADX) Indicator

In both situations, if the blue is moving upward from 25%, it’s a signal of a trend. Some sources refer to the 0-25% zone as the violet range conditions. This is true for currency pairs that have relatively low liquidity. All values of levels and settings depend on the market situation and should be seen as recommendations. In this guide, we will examine the ADX indicator in great detail and see how to calculate it, work with it, and find signals.

If the -DI is above the +DI, when the ADX moves above 25 that could trigger a short trade. There are a number of ways the DMI can be used to trade, in addition to the general guidelines discussed above. Lionel owns several shares of stock in a company, and he sees that the stock’s price has been rising a lot over the past month. Now he’s wondering if he should sell his shares now or if he should hold on to them for a little while longer.

The Best Settings, Timeframes, and Levels for ADX

Trade theory suggests adding trend tools to the oscillator – for example, a moving average or a combination of ADX and EMA. It is a set of MAs with different periods that show four stages of a trend – beginning, active phase, weakening trend, and flat. In his book “New Concepts in Technical Trading Systems,” he described adx meaning a system of directional price movement, which was called DMS (Directional Movement System). It includes a series of indicators that describe the nature of the trend price movement – its direction and the trend strength. You are already familiar with one of them – one of the main MT4 indicators — ATR, average true range.

Using it, you can decide whether to move with a trend or not. Get virtual funds, test your strategy and prove your skills in real market conditions. From beginners to experts, all traders need to know a wide range of technical terms. EUR/CHF broke below the bottom of the range and went on a strong downtrend. It is based on comparing the highs and lows of bars and does not use the close of the bar.

Trading with Wilder’s DMI

Of course, ADX’s current reading does not necessarily mean that stocks will continue to rise. More importantly, the lingering threat of inflation, supply chain problems, geopolitical risks, and more could render chart patterns and indicators like ADX irrelevant. With that said, ADX can be used to supplement your view of short-term trends.

  • A falling ADX line only means that the trend strength is weakening, but it usually does not mean the trend is reversing, unless there has been a price climax.
  • By looking at the relationship between the two lines traders can better assess whether upward or downward price movement is stronger.
  • That’s why we recommend investing 15% of your income in tax-advantaged retirement accounts like your 401(k) and Roth IRA.
  • Because of this, the -DI is not an average, even though it may sometimes appear to track the price when the price is falling.
  • Wilder determined directional movement by comparing the difference between two consecutive lows with the difference between their respective highs.

However, a series of lower ADX peaks is a warning to watch price and manage risk. The best trading decisions are made on objective signals, not emotion. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks.