What is the ADX Indicator? Definition, Formula, and Example
The Average Directional Index (ADX) measures trend strength on a scale of 0 to 100 without indicating direction.
Definition
The Average Directional Index (ADX) is a technical indicator that quantifies the strength of a trend on a scale from 0 to 100. It does not tell a trader whether the trend is up or down; it only tells how strong the trend is. ADX is derived from the directional movement system, which also produces the +DI and -DI lines. Traders use ADX to decide whether to apply trend-following strategies or range-bound strategies, because trend-following tools tend to fail when ADX is low.
How it is calculated
The ADX calculation begins with directional movement. Plus directional movement (+DM) equals the current high minus the prior high when that move is positive and greater than the prior low minus the current low; otherwise it is zero. Minus directional movement (-DM) equals the prior low minus the current low when that move is positive and greater than the current high minus the prior high; otherwise it is zero.
True range (TR) is the greatest of the current high minus the current low, the absolute value of the current high minus the prior close, or the absolute value of the current low minus the prior close.
Smoothed values are calculated over 14 periods using Wilder's smoothing method.
+DI = 100 × Smoothed +DM / Smoothed TR
-DI = 100 × Smoothed -DM / Smoothed TR
Directional index (DX) = 100 × |+DI - -DI| / (+DI + -DI)
ADX = Smoothed average of DX over 14 periods
Worked example
[NVDA] closes at $120 with a 14-day ADX of 18, indicating a weak trend or choppy market. Over the next two weeks, [NVDA] rallies from $120 to $145 with consistent higher highs and higher lows. The +DI line rises above 30 while -DI falls below 15, and the ADX climbs to 34. A trader using an ADX threshold of 25 now classifies the market as trending and avoids mean-reversion setups. If ADX later falls back below 20, the trend is considered exhausted and trend-following signals are disregarded.
When traders use it
Traders use ADX as a regime filter. When ADX is above 25, trend-following strategies such as moving average crossovers and breakout trades are favored. When ADX is below 20, traders favor range-bound strategies such as selling options or buying support and selling resistance. ADX is also used to time exits; a declining ADX after a peak signals that momentum is weakening even if price continues to rise. the live scanner
Limitations and common misconceptions
ADX is a lagging indicator because it is derived from smoothed price data, so it confirms trend strength after the move has already begun. A rising ADX does not indicate direction; a strong downtrend produces the same ADX reading as a strong uptrend. Traders must check +DI versus -DI to determine bias. ADX can remain elevated during a volatile chop if directional movement is consistent in one direction, so it should not be used in isolation.