ADX: strength is not direction

Prerequisite: A repeatable multi-timeframe process

On a small screen, scroll the figure sideways or open it full size.

Learning objective

Separate ADX trend strength from the directional information in plus and minus DI.

Average Directional Index summarises the strength of directional movement through smoothing. It is commonly displayed with +DI and −DI. ADX by itself does not distinguish an uptrend from a downtrend: either can produce a high or rising value when directional movement is persistent.

Common reference levels such as 20 or 25 are conventions rather than proven universal switches. Period choice, smoothing and instrument behaviour influence the reading. A rising ADX after a price jump can be a delayed description of movement already underway, rather than an early announcement.

Use the measure to specify a research regime, such as whether a trend-following hypothesis is evaluated only above a predetermined threshold. Keep direction, entry, stop, exit and costs separate. When ADX declines, a trend may be weakening; that does not establish an immediate reversal or a safe range.

Common mistakes

Do not buy because ADX rises. Avoid tuning a threshold after seeing the most profitable historical examples; smoothing creates delay, and no trend-strength reading guarantees continuation.

Practice

Compare a hypothetical rising market and falling market that both have ADX 30. State what extra information is necessary to describe direction and define a fixed regime threshold.

Sources & further reading

• Fidelity — Average Directional Index