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ADX

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ADX Definition

The ADX (Average Directional Index) is a creation from technical analysis legend J. Welles Wilder. The ADX is a lagging indicator used to assess the strength of a trend. The ADX can be used on any trading time frame to determine key turning points in the market. In addition to identifying trending markets and pivots, the ADX is also used to identify choppy markets. The ADX ranges from 0 to 100. ADX values above 40 generally imply trending markets, while readings below 20 indicate flat trading.

Trading with the ADX

If you are a breakout trader, you will want to avoid trading when the ADX technical indicator is below 40. What will often happen if you put a trade on with the ADX under 40, is the stock will tend to produce false breakouts, or even worse, trend sideways for an extended period of time.

Below is an example on a 5-minute chart of how to use the ADX as confirmation with a breakout.

ADX Breakout

Below is an example on a 5-minute chart of the choppiness that occurs when there is a flat ADX reading.

Choppy ADX

Alton Hill

Alton Hill

I am one of the co-founders of Tradingsim and an IT consultant who specializes in large scale Systems Integration projects. I have traded the markets actively since 2000 and believe that true trading mastery comes from practice . When I'm not working on a new day trading strategy, I enjoy spending time with my wife and 3 young sons.
Alton Hill
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