Calculating ADX and Using Directional Indicators to Identify Trends

Summary

The article explains how the Average Directional Index (ADX) measures trend strength without indicating trend direction. Direction is assessed with the positive and negative directional indicators (+DI and -DI), while ADX is derived from the separation between them. It walks through true range, positive and negative directional movement, smoothing, directional index calculation, and averaging. The worked price table uses a five-period smoothing example, and the article cites an ADX value above 25 as a commonly used sign of a strong trend.

For a trading illustration, it describes marking periods when ADX exceeds that threshold, then taking direction from which directional indicator is higher. It shows this approach on Apple price data and notes a period of rising prices alongside elevated ADX. The article cautions that indicators are imperfect and recommends confirmation from other indicators. It does not provide a robust backtest design or establish that the example’s returns would persist after costs or across other markets.

Key ideas

• ADX estimates trend strength and does not identify whether the trend is upward or downward.
• The positive and negative directional indicators provide directional information, while ADX reflects their relative separation.
• The calculation builds from true range and directional movement, then smooths those values into indicators.
• The example treats ADX above 25 as a strong-trend signal and uses the larger directional indicator to choose direction.
• The article presents an illustrative price example but does not establish robust, cost-adjusted performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.