The Average Directional Index (ADX) does not indicate trend direction or momentum, only trend strength. ADX is often used to identify whether the market is ranging or starting a new trend.
ADX will range between 0 and 100. Generally, ADX readings below 20 indicate trend weakness, and readings above 40 indicate trend strength. An extremely strong trend is indicated by readings above 50.
ADX can be used to confirm coin’s current trend. You could also combine ADX with a trend indicator (SMA, EMA) that identifies whether the coin pair is trending up or down. ADX can also be used to determine if you should close a trade early – when ADX starts to slide below 50, it indicates that the current trend is weakening.
- The ADX is a combination of two other indicators, the positive directional indicator (abbreviated +DI) and negative directional indicator (-DI). The ADX combines them and smooths the result with a smoothed moving average.
- To calculate +DI and -DI, one needs price data consisting of high, low, and closing prices each period (typically each day). One first calculates the directional movement (+DM and -DM):
- UpMove = today’s high − yesterday’s high
- DownMove = yesterday’s low − today’s low
- if UpMove > DownMove and UpMove > 0, then +DM = UpMove, else +DM = 0
- if DownMove > UpMove and DownMove > 0, then -DM = DownMove, else -DM = 0
- After selecting the number of periods (Wilder used 14 days originally), +DI and -DI are:
- +DI = 100 times the smoothed moving averageof (+DM) divided by average true range
- -DI = 100 times the smoothed moving averageof (-DM) divided by average true range
- The smoothed moving average is calculated over the number of periods selected, and the average true range is a smoothed average of the true ranges. Then:
- ADX = 100 times the smoothed moving averageof the absolute value of (+DI − -DI) divided by (+DI + -DI)