ADX explained: measuring trend strength with +DI and −DI

The Average Directional Index (ADX) measures how strongly a market is trending, on a scale from 0 to 100. It does not say whether the trend is up or down; that job belongs to its two companion lines, +DI and −DI. Used together, they help answer a question many indicators skip: "Is there a trend worth following at all?"

The three lines

ADX is part of Wilder's Directional Movement System, published in 1978 alongside RSI, ATR and Parabolic SAR.

• +DI (positive directional indicator) measures how much of recent movement was upward.
• −DI (negative directional indicator) measures how much was downward.
• ADX is a smoothed measure of how far apart +DI and −DI are, regardless of which one is on top.

The default period is 14.

How it is calculated, in brief

For each candle, compare today's high with yesterday's high (upward movement) and yesterday's low with today's low (downward movement). Only the larger of the two counts, and only if it is positive; the other is set to zero. These values are smoothed over 14 periods and divided by the ATR of the same period, giving +DI and −DI as percentages.

Then the directional index DX = |+DI − −DI| / (+DI + −DI) × 100, and ADX is the smoothed average of DX. Because it uses the absolute difference, a strong down-move and a strong up-move produce the same ADX.

Reading the numbers

A commonly used guide:

These thresholds are conventions, not physical constants. On some instruments and timeframes, 20 behaves like 25 elsewhere. Observe the instrument you trade on a demo account before adopting any threshold.

For direction, look at the DI lines: +DI above −DI suggests upward pressure dominates; −DI above +DI suggests downward pressure.

ADX is direction-agnostic

This is the point most often misread. A rising ADX does not mean price is rising. If EUR/USD falls steadily for two hours, ADX rises, while −DI stays above +DI. A falling ADX does not mean price is falling; it means the trend, whichever way it went, is losing strength.

ADX also turns down even when a trend merely pauses. A drop from 38 to 32 can be a consolidation in a still-intact trend, not a reversal.

A worked example

GBP/USD on M15. During the Asian session ADX sits at 14, +DI and −DI cross each other every few candles, and price moves in a 15-pip box. ADX says: no trend, so trend-following tools are likely to whipsaw here.

At the London open, price breaks below the box. −DI jumps above +DI, and over the next six candles ADX climbs from 14 to 27. Now ADX says a trend is present, and the DI lines say it points down. A trader using market structure would see lower lows and lower highs forming at the same time; the two views agree.

The failure case: ADX climbs to 27 on a single sharp news candle, then price snaps back into the box. ADX keeps rising for a few more candles because of its smoothing, even though the move already failed. ADX is slow on the way up and slow on the way down.

Combining ADX with trend tools

ADX works best as a filter rather than a trigger:

• Use ADX to decide whether trend tools are appropriate. Low ADX: treat Parabolic SAR flips and moving-average crossovers with suspicion.
• Use DI lines, moving averages or market structure to decide which way.
• Use price levels to decide where something might happen.

DI crossovers on their own generate many false signals in ranges, which is exactly the condition ADX is meant to warn you about.

Short expiries and OTC

ADX needs many candles to build up, and its double smoothing makes it lag. On S5–M1 charts, it reacts after most short moves are done. For short expiries, it is more useful read on M5 or M15 as a description of the current regime: trending or not.

On Sky Trade's OTC instruments, prices are generated by Sky Trade's server and do not follow any real market. The model makes the next move unpredictable, so even a high ADX there describes past randomness and not a trend you can expect to continue.

How to use it in the Sky Trade terminal

ADX is in the oscillators group of the indicators list and appears in a separate panel under the chart. Keep period 14 and look at ADX together with the DI lines rather than one number in isolation.