ADX (Average Directional Index) is a directional indicator developed by Welles Wilder that is used to measure the strength of a trend. The indicator is trend neutral and focuses solely on the probability of the trend, whatever it may be, continuing. Wilder developed two more indicators in the same family to catch the probable direction of the trend and those are called Positive Directional Indicator (+DI) and Negative Directional Index (-DI). These three indicators are used together to ascertain the trend strength and direction. The default parameter for all the indicators is 14 and that is the most popular setting too.
Advantages And Limitations of ADX
The primary application of the indicator is to identify the actual nature of the price movement in any particular period of time. If the ADX is below 25, the trend (up or down) can be taken as weak and the probability of a sideways move looks greater. A move above 25 implies an increase in the strength of the trend and then the position of +DI and –DI must be checked. If the +DI is above the –DI when the ADX is above 25, the bulls are in a strong position and the reverse is also true for the bears.