What it is
ADX and the Directional Movement Index (DMI) come together as three lines, all developed by J. Welles Wilder. +DI measures how much of recent movement has been upward, -DI how much has been downward. ADX takes the gap between them and smooths it, so it rises when one side clearly dominates, whichever side that is.
That is why ADX is a filter, not a signal. A rising ADX in a falling market is a strong downtrend. A falling ADX simply says the trend, up or down, is losing its grip and the market may be heading into a range.
How it is calculated
1. For each candle, up move = today's high minus yesterday's high, and down move = yesterday's low minus today's low. 2. +DM is the up move if it is positive and bigger than the down move, otherwise 0. -DM is the down move if it is positive and bigger than the up move, otherwise 0. 3. Work out the true range: the largest of high minus low, high minus previous close, and previous close minus low. 4. Smooth +DM, -DM and true range over 14 candles using Wilder's smoothing. 5. +DI = 100 times smoothed +DM divided by smoothed true range. -DI is the same with -DM. 6. DX = 100 times the gap between +DI and -DI divided by their sum. 7. ADX = DX smoothed over 14 candles with Wilder's smoothing.
Settings
| Setting | Default | Range | What it changes |
|---|---|---|---|
| Length | 14 | 2 to 100 | Candles used for every smoothing step. Shorter reacts faster to new trends but gives more false readings; longer is steadier but late. |
How to read it
How to trade it
- 1
On a 1 hour gold chart, only look for trend trades when ADX(14) is above 25 and rising.
- 2
Take direction from the DI lines: with +DI above -DI, wait for a pull-back to a moving average or the last breakout level and buy when a candle closes back up.
- 3
Place the stop below the pull-back low, often 1 to 1.5 times the average true range away, for example 10 to 15 points on 1 hour gold.
- 4
Target at least 2 times the stop, and trail it while ADX keeps rising.
- 5
When ADX is under 20, skip breakout trades on US30 and NAS100 and look for range reversals at levels instead.
A trend trade taken on ADX is proved wrong when the DI lines cross against you (for a buy, -DI closes above +DI) or price closes below the pull-back low. ADX falling back under 20 also says the trend condition has gone.
WickSpeak runs in your browser with nothing to install. When you add ADX / DMI, it writes a plain-English reading on the live candle: what the indicator is, what it is doing right now, how to trade it and what would prove that reading wrong. It says how strong the trend is now, whether ADX is rising or falling, and which side leads on the DI lines, then explains what kind of trade suits that reading.
In Playbook, our no-code strategy builder, ADX can be a condition in a play. It can test whether ADX: is above a level you set; is below a level you set; is between two levels you set; crosses above a level you set; is rising; buyers lead (+DI above -DI); sellers lead (-DI above +DI). Each condition can run on any of 12 timeframes from 1 minute to weekly, combined with up to 11 others, and the play can be backtested on past candles with your own costs and turned into alerts on screen, by email or by phone push. A common play is an ADX filter, such as ADX above 25 and buyers lead, combined with an entry condition from another indicator or a pattern.
Best markets and timeframes
Works on any liquid market. On gold, US30 and NAS100 it is most useful on 15 minute to daily charts as a filter for whether to trade breakouts or ranges.
Common mistakes
- Reading a high ADX as bullish. A high ADX in a falling market is a strong downtrend.
- Selling because ADX turned down. A falling ADX means the trend is slowing, not reversing.
- Trading every DI crossover, most of which happen in weak, choppy markets with ADX below 20.
Works well with
Questions traders ask
What is a good ADX level?
Below 20 usually means no trend, 20 to 25 is a grey zone, and above 25 means a trend is in place. Readings above 40 show a very strong trend that may be getting stretched.
Does ADX show if the trend is up or down?
No. ADX only measures strength. Use the +DI and -DI lines for direction: +DI above -DI means buyers lead, -DI above +DI means sellers lead.
What are the best ADX settings for day trading?
14 is the standard and works on most intraday charts. Some day traders use 7 to 10 for a faster reading on 5 minute charts, at the cost of more false signals.
What is the difference between ADX and DMI?
DMI is the pair of +DI and -DI lines that show direction. ADX is built from them and shows strength. Most platforms draw all three together.