ADX (Average Directional Index)

The Average Directional Index (ADX) is a technical analysis indicator developed by J. Welles Wilder. It is used to measure the strength of a trend in a financial asset and is often used in conjunction with other technical indicators.

The ADX ranges from 0 to 100. Values between 0 and 25 indicate a weak trend or no trend at all, while values between 25 and 50 indicate a moderate level of trend strength. Values between 50 and 75 indicate a strong trend, and values between 75 and 100 indicate a very strong trend.

The ADX is calculated using two directional indicators called +DI (Positive Directional Indicator) and -DI (Negative Directional Indicator). These indicators compare the highest and lowest price movements within a specified period to determine the strength of upward and downward movements. The ADX is then derived by taking the difference between +DI and -DI and smoothing it with a 14-period average to measure the strength of the trend.

Since the ADX is used to measure the strength of a trend, investors and traders often use it to identify the beginning and end of trends. For example, when the ADX is rising and +DI is higher than -DI, it suggests a strong upward trend. Conversely, when the ADX is declining and -DI is higher than +DI, it suggests a strong downward trend.

The ADX should be used in conjunction with other technical analysis tools and indicators. For example, combining the ADX with moving averages, trendlines, and support/resistance levels can provide stronger and more accurate signals.

The ADX can be applied to various financial assets such as stocks, commodities, currencies, and more. However, it is important to note that the ADX can sometimes provide false signals, so it should be used in conjunction with other analysis tools and evaluated in the context of market conditions and other factors.