ADX (Average Directional Movement Index)
Developed in the 70s by J. Welles Wilder, this technical indicator based on moving averages measures the strength of the trend over a given period of time. Best used in trending markets rather than ranging ones, this indicator is focused on trend strength, not on trend momentum or direction. ADX values range between 0 and 100, where an ADX reading of less than 20-25 indicates a weak trend, while a reading over 40 means a strong trend. Any reading over 50 is indicative of an extremely powerful trend.
The ADX indicator, as you may find it supplied by your favorite trading platform, comes with a default setting of 14 periods. It is displayed just below the main data window and consists of three lines: the blue line is the actual trend strength indicator, while the green and red lines are the directional moving indicators (DMI), which also serve as the base for the calculation of ADX.
When the green DMI line is over the red line, the ADX indicator measures the strength of the upwards moving trend, and when the red DMI line is over the green line, ADX measures the downtrend strength. There is a possibility that a very weak trend may reverse, but ADX is not an indicator that predicts such a trend reversal. A trend with a falling ADX reading is nothing more than just a weak trend until otherwise confirmed that a reversal is taking place.
Worth noting is that ADX is a lagging indicator, which means that a trend has already formed and is established by the time ADX signals that a trend exists.
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