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Bythice
Average Directional Index
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Summary
The Average Directional Index (ADX) measures trend strength without indicating direction. Values above 25 suggest a significant trend, while above 40 indicate a very strong trend. Traders can use ADX to identify when to “trade with the trend” and when to “avoid ranging markets.”
What Is ADX?
Developed by J. Welles Wilder Jr. in 1978, the Average Directional Index (ADX) quantifies trend strength rather than direction. ADX is calculated from the positive (+DI) and negative (–DI) directional indicators and the True Range (TR), then smoothed and scaled to 0–100.
How to Read ADX?
- ADX < 20: Weak trend or range-bound market.
- 20 ≤ ADX ≤ 40: Moderate trend strength—use trend-following strategies.
- ADX > 40: Strong trend.
- Bullish: +DI > –DI and ADX > 20.
- Bearish: –DI > +DI and ADX > 20.
Practical Strategies
- Trend-Following: Enter when ADX > 25 and +DI crosses above –DI (buy) or vice versa (sell).
- Trend End: Exit when ADX falls below 20 after being above.
- Filter: Only trade other signals (RSI, MACD) when ADX > 20 to reduce false breakouts.
Tips & Cautions
Volume Confirmation: Volume-supported breakouts are more reliable.
Combine Indicators: Use RSI or MACD to refine entry when ADX > 20.
Multiple Timeframes: Confirm ADX trends on both daily and hourly charts.
Period Adjustment: Default 14; use 7 for short-term, 20 for long-term.
Be Patient: ADX is lagging—avoid premature exits.
