The Average Directional Index (ADX) technical indicator is used to detect the presence of a price trend, while also showing the trend’s strength.
J. Welles Wilder developed and described the indicator in 1978 in his book “New concepts in technical trading systems” and the author views it as his favorite invention. The indicator is used to trade in a day time frame and helps to identify long-term market trends while determining its strength.
The indicator consists of the ADX curve and two opposite +/- DI lines:
- ADX line — indicates the trend in the market (flat or trend).
- -DI line — shows the price of the asset is decreasing;
- +DI line — shows the price of the asset is increasing;
The indicator is generally seen as a type of oscillator with values ranging from 0 to 100. A value less than 20 indicates a weak trend, while a value between 20 and 40 indicates a strong trend. A very powerful trend is indicated by values between 40 and 60, while values of higher than 60 ADX are extremely rare. The ADX does not show the trend’s direction, but only measures its strength.
If there is a trend in the market – bearish or bullish – the distance between the DI signal lines starts increasing and ADX starts to get bigger, while activity in the market decreasing will result in the distance between the DI signal lines declining and the ADX dropping.
Configuring the indicator
Always configure the indicator in a separate Technical Analysis window on Olymp Trade’s platform. The indicator can be found in the in the Indicators tab by selecting “Indicators form” in the Trends section:
Normally, the indicator period is left at its default setting of 14, although settings of 12, 18, and 21 are also popular. Any period value between 7 and 30 can in fact be used.
Although the trend information will become more reliable the longer the period is, the calculation of the indicator will take much longer, and a significant part of the trend may in fact be skipped by the time it is reported by the indicator. Although shorter periods will make the calculation faster and allows for trend information to be received faster, more of those signals will be false.
The Horizontal line tool can also be used to add 2 lines at the 20 and 40 levels to orient the ADX values.