Average Directional Index (ADX)

The Average Directional Index (ADX) was developed in 1978 by J. Welles Wilder. It is a commonly used as an indicator to measure the strength of a trend. High readings indicate a strong trend and low readings indicate a weak trend. The ADX will range between 0 and 100. Typically, ADX readings below 20 indicate trend weakness, and readings above 40 indicate trend strength. When a trader is using the ADX, he is generally looking for a high ADX reading. This would signify that a trend is already developed and a good trading environment exists.

A very important part of understanding the ADX indicator is to recognize that this indicator only denotes the strength of a trend and not necessarily which direction the trend is moving. Therefore, careful analysis of the existing trends and potential trend reversals is important to successfully use the ADX.