ADX (Average Directional Movement Index) is a very useful indicator for measuring trend strength as well as the prevailing main trend. The ADX indicator was developed by Welles Welder and was presented in his book, “New concepts in technical trading systems”.
The ADX indicators is made up of +DI and –DI (Directional Index). The + and – DI are nothing but the difference between today’s high and yesterday’s high or today’s low and yesterday’s low. At any point in time only either +DI or –DI changes its value.
The ADX is then calculated based on the + and – DI’s.
The ADX indicator is reliable enough to provide trading signals on its own. Welles Welder recommended that only buy positions should be taken when the +DI is above the –DI and to consider short positions when –DI is above +DI. The trend strength is also to be taken into consideration by using the ADX. When the ADX is rising above 20 it indicates the start of the new trend and when the ADX falls below 20, it indicates ranging markets. The ADX indicator does not indicate up or down trends but only signals the strength of the trend. The + and – DI are to be considered when determining the prevailing trend.