ADX Indicator

In most cases, the ADX is considered to be the ultimate trend indicator and widely used by all technical traders and analysts as it can be used with stocks despite originally being designed for commodities and daily prices. If used in conjunction with the Plus Directional Indicator and Minus Directional indicator, which determine trend direction, a trader can measure direction and strength of a particular trend. To ensure greater outcomes, the technical trader will use the ADX to gauge if the market is trading or trending and will then alter the settings of their indicators to the conditions of the current market. Therefore, it can be said that a more dynamic trading system that utilizes ADX as a key indicator will maximize results.

The ADX indicator is calculated on the moving average of a price range expansion over a given period and can measure if the a trend is trending up or down due to it being non-directional.This means that the ADX can not measure whether a market is bullish or bearish and as a result a reading of 20 could be indicating an upward or downward trend. It does however indicate a weak trend just as a reading of 40 would indicate a strong trend.

On a whole, the ADX uses values that range from zero (lowest point) to 100 (highest point) and is plotted as a single line in the same window as the two directional movement indicators (plus and minus). It is important to note that using the ADX as a trend following indicator should only occur when the reading is above 25 and should definitely not be used if the ADX is below 20.