What is the Average Directional Movement Index?
The Average Directional Movement Index, or ADX, is a technical indicator used to measure the strength of a trend regardless of a bull or bear trend. Like the Relative Strength Index, it aims to quantify trend strength.
How Do I Trade With the ADX?
The ADX is best used and typically charted with the DMI lines. The DMI lines consist of a plus line DI+ and a minus line DI-. The DI+ line is usually colored as a green line and the DI- line is generally colored as a red line. However, if you have advanced charting software you can customize the colors anyway you like.
When the DI+ line is above the DI- line, the trend is considered to be bullish and the further apart the lines, the stronger the trend. Similarly, when the DI- line is above the DI+ line, the trend is considered to be bearish and the further apart the lines, the stronger the bear trend.
As the DI lines form and the ADX rises or falls, you will want to take a bullish position when the ADX rises towards 40 and the DI- line is on top. Likewise, when the ADX rises toward 40 and the DI+ line is on top, you will want to take a bearish position.
It is not the best indicator to use in sideways markets as it gives lots of false signals.