Average Directional Movement Index (ADX)

Average Directional Movement Index (ADX) shows

• 1. if there is a trend on the market and
• 2. what potential it has.

ADX represents two opposite +/-DM and ADX lines (Figure 1):

• 1. The first goes in the direction of the price movement (line 1, +DM);
• 2. The second goes in the opposite direction (line 2, -DM);
• 3. The third (ADX) is the absolute difference between +/-DM lines, so the more divergence between +/-DM lines, the greater the value of ADX.

Average Directional Movement Index (ADX) signals:

• 1. Intersection with the extremum lines or reversal at high-low;
• 2. +DM and -DM lines intersection precedes a new trend or strengthens the prevailing one - it is a very strong signal;
• 3. If +DM line is above -DM line, then the trend is bullish, and vice versa;
• 4. If lines diverge then ADX value increases and the trend becomes stronger, and vice versa;
• 5. If ADX is below 20, then the trend is very weak.

ADX	Trend	+DM . . . -DM	Buy/Sell
Very low	Weak		-
Falling	Loses strength		-
Rises	Becomes stronger	Higher Lower	Buy Sell
Forms local low	local low A new one	Higher Lower	Buy Sell
Very high	Chances for a reversal are great		Take profit on some open positions
Forms local high	Market is overbought / oversold