Most indicators tell you which way the market is moving. The Average Directional Index (ADX), developed by J. Welles Wilder Jr., answers a different question: is it trending at all? That makes it one of the most useful filters for deciding which strategy to use.
The three lines
The ADX indicator usually plots three lines:
- ADX — trend strength, from 0 to 100.
- +DI (positive directional indicator) — strength of upward movement.
- −DI (negative directional indicator) — strength of downward movement.
ADX is a smoothed measure of the difference between +DI and −DI. When one side clearly dominates, ADX rises — regardless of whether the trend is up or down.
Reading ADX
| ADX | Interpretation |
|---|---|
| Below 20 | Weak or no trend — range conditions |
| 20–25 | Trend may be developing |
| 25–40 | Trending market |
| Above 40 | Very strong trend, possibly overextended |
A rising ADX means the trend is strengthening; a falling ADX means it’s weakening, even if price is still moving in the same direction.
Using ADX as a strategy filter
ADX is most valuable for choosing the right tool:
- ADX above 25 and rising: use trend strategies — pullbacks, breakouts, moving average trend filters.
- ADX below 20: use range strategies — mean reversion to the middle Bollinger Band, fading range extremes with RSI or the stochastic.
Many losing streaks come from running a trend strategy in a range or a range strategy in a trend. An ADX filter catches a lot of that.
The DI crossover
When +DI crosses above −DI, upward pressure is taking over; the reverse signals downward pressure. Crossovers are more reliable when ADX is above 20–25. Below that, they whipsaw constantly.
A simple ADX trend rule set
- ADX(14) above 25.
- +DI above −DI for longs (−DI above +DI for shorts).
- Wait for a pullback to the 20-period EMA.
- Enter on a candle that closes back in the trend direction.
- Stop below the pullback low; trail under higher lows.
Size the position from the stop with the position size calculator.
A worked example
On the 4-hour chart, EUR/USD’s ADX rises from 22 to 27 over a week, with +DI at 29 and −DI at 15. The market has moved from “no trend” into a strengthening uptrend.
- Strategy choice: trend-following only — buy pullbacks, skip range fades.
- Setup: price pulls back to the 20 EMA and closes bullish at 1.0910.
- Stop: below the pullback low at 1.0885 — 25 pips.
- Target: 2R, 1.0910 + 0.0050 = 1.0960.
A week later ADX peaks at 41 and starts to fall while price is still rising — a sign the trend is maturing. That is a reason to tighten the trailing stop, not to short.
Limitations
- Lag. ADX is double-smoothed, so it confirms trends after they’ve started.
- Peaks aren’t reversals. A falling ADX from 45 often means a trend is pausing, not reversing.
- Not for timing entries. Use price structure for timing; use ADX to decide whether to trade the trend at all.
Frequently asked questions
What is a good ADX value?
Readings above 25 are commonly treated as a trending market and readings below 20 as weak or no trend. Values above 40 indicate a very strong trend that may be maturing.
Does ADX show trend direction?
No. ADX measures only strength. Direction comes from the +DI and −DI lines — +DI above −DI suggests an uptrend, −DI above +DI a downtrend.
What are the standard ADX settings?
The default is 14 periods, as originally used by J. Welles Wilder Jr. Shorter settings react faster but produce more noise.
What timeframe is best for ADX?
ADX is most often used on the 1-hour, 4-hour and daily charts. On very short timeframes its readings change quickly and are more affected by noise.
Can ADX help with range trading?
Yes. A low and falling ADX, typically below 20, suggests no strong trend, which is when range strategies such as Bollinger Band reversion tend to work best.