Usually, readings that are close to 0 or greater than 60 are not common occurrences. It helps traders to spot the strongest trends and, in turn, capture the most profitable trades. The ADX value spans from 0 to 100, and it signifies the trend’s strength irrespective of its direction. ADX can be used on trading vehicles such as stocks, mutual funds, exchange-traded funds, and futures.Īs mentioned before, the ADX indicator comprises three components, namely: The default ADX is calculated for 14-time units, although other periods can be used. ADX is calculated based on the moving average of a price range spanning over a given period. Calculating the ADXĪDX is primarily used to quantify the strength of a trend. Therefore, an ADX indicator has three lines on the chart: DI+, DI-, and the ADX line. The ADX is derived from two accompanying indicators: the Positive Directional Index (DI+) and the Negative Directional Index (DI-). Welles originally developed the indicator for the commodity industry but due to its high relevance and competence, it became a popular indicator for technical trading of stocks as well. The ADX primarily determines the core strength of a trend. It is an indicator developed by Welles Wilder to fathom the strength of a price movement, either in a positive or negative direction. This article covers:Īverage Directional Index forms a part of the Directional Movement System. One such indicator used to understand the strength of a trend is the Average Directional Index (ADX). There are various technical indicators that help traders assess the momentum.
This strategy can reduce a trader’s risk and increase profit potential. Generally, trend trading attempts to utilise the momentum of an asset in a particular direction to capitalise on gains. Detecting a strong directional move is the cornerstone of a trader’s toolkit. Trend chasing is one of the most popular and profitable technical trading methods.