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Average Directional Index (ADX)

Developed by J. Welles Wilder, the Average Directional Index (ADX) measures the degree of directional movement and reflects strength of a trend. The ADX line measures the directional movement as an oscillator on a scale of 0 to 100.

Readings below 20 reflect a weak trend and readings above 40 reflect a strong trend. Readings above 60 are rare. ADX levels can be used to signal the move from a sideways to trending market (movement above 20) and a trending market to a sideways market (movement down below 40).

When the ADX line is rising this indicates that the market is trending and trend following systems and indicators (for example Parabolic SAR, and Moving Averages) are appropriate for use. When the ADX line is sloping downwards this indicates that the market is in a non-trending, or sideways environment and that non-trending indicators (for example an oscillator such as RSI ) are appropriate for use.

Chart courtesy of Prophet Financial Systems (www.prophet.net)

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