The ADX Indicator – Average Directional Index
The ADX Indicator, or Average Directional Index, was developed in order to evaluate the strength of the current stock price trend, whether up or down.
The ADX is measured is measured on a scale of 1 – 100. The standard unit of measurement is 14 days.
High ADX readings reflect a strongly trending stock. In general, 14-day ADX readings above 30 suggest a strongly trending stock.
Low ADX numbers reflect non-trending markets, generally less than 20. Interestingly, when ADX drops below 18, it often leads to a sideways or rectangle type trading pattern , and the moving averages start to cluster around the price of the stock.
The ADX Indicator does NOT act well as a trigger. Prices will always move faster than the Average Directional Index, as there is too much of a smoothing factor, which causes it to lag the stock price movement.
For further in-depth information on the ADX Indicator in the stock market and using it for a stock trading system, check out this resource which contains critical information to help you learn to use stock charts and the ADX indicator in a clear, simple and concise manner to improve your trade entries and exits.
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ADX Uses
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There are three strong uses for the ADX:
- Breakout from Basing Pattern
- Over-extended high stock price
- Swing Trade
Breakout
A rising ADX is a reliable indication of a trend when there has been an extended sideways rectangle period before the trend gets started. This is also known as a basing pattern.
When your stock you are analyzing is in a sideways basing rectangle, the ADX is most effective when it begins to rise from a low level, 18 or less.
When there is a price breakout, and the ADX was at 18 or below, confirm the breakout by seeing if today’s ADX level, is above yesterdays ADX level.
Also confirm with On Balance Volume.
See the chart below.
When Day Trading, an ADX above 40 indicates a strong trend or breakout is in progress, and price is likely to continue in the direction of the current trend.
Because the ADX measures trend strength rather than direction, the ADX line will move up sharply during sell-offs as well as up moves.
This is the single most valuable use of the ADX indicator: as a leading indicator on hourly charts to help spot potential breakout continuations after an ADX reading above 40 occurs.
The ADX Mastery Course explains this and other ADX tactics in more detail.
See the Chart Below
Over-Extended high stock price
This is also known as a Climax Run or a High Flyer.
When a share price has gone to extreme highs very quickly, and the ADX is rising and above 50 and turns down, this is a signal that a possible price reversal is at hand. So a stock trader can look to get ready to sell, and get set-up to sell short.
See the chart below.
Swing Trade
In an up-trend swing trade, if the ADX Indicator is above 30, when the ADX forms a top and begins to turn down, you should look for a share price retracement down to the 20 day exponential moving average (EMA).
See the chart below.
In a down-trend swing trade, if the ADX is above 30, when the ADX forms a top and begins to turn down, you should look for a share price retracement up to the 20 day exponential moving average (EMA).
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Recommended Technical Analysis Tools and Resources
Recommended Technical Stock Trading Software
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Tell Us About Your Favorite ADX Indicator Use and Strategy
Is there a specific ADX Indicator Strategy or Technique that you use, that is not described on this page?
Here is your opportunity to share your ADX expertise and technique, to help and coach other newbie Stock Traders become more proficient and confident on their journey to Stock Trading Success and Profitability!
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