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Lesson 4: 7.3: Average Directional Index (ADX) & Momentum
Quantify trend strength and momentum using ADX, +DI, and -DI indicators to filter ranging markets.
1. Deconstructing the ADX System
The Average Directional Index (ADX) is a non-directional indicator that measures the strength of a trend, regardless of whether price is moving up or down.
It is derived from the Directional Movement Index (DMI), which consists of +DI (positive directional indicator, measuring buying pressure) and -DI (negative directional indicator, measuring selling pressure).
★ Trend Filtering: An ADX reading above 25 indicates a strong trend is underway, meaning trend-following strategies should be used. An ADX below 20 indicates choppy, ranging markets, where mean-reversion strategies are preferred.
Click to enlarge2. Crossovers & Exhaustion
When +DI crosses above -DI, it indicates a bullish trigger. When -DI crosses above +DI, a bearish trigger occurs. If ADX climbs above 40 and then rolls over, it often signals trend exhaustion and profit-taking.
KNOWLEDGE RECONNAISSANCE
What does an ADX reading of 15 typically suggest about the market condition?
More lessons in this module
- 7.0: Foundations of Trend Theory
- 7.1: Moving Averages as Dynamic Support & Resistance
- 7.2: Trendlines, Channels & Acceleration
- 7.4: Trend Reversals vs. Pullbacks
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