Classifying Trends with ATR, ADX, and Directional Indicators

Summary

This indicator classifies market conditions as sideways, upward, or downward. It first treats a market as sideways if either the average true range is at or below its 20-period average, or the ADX is at or below 25. If neither sideways condition applies, it compares the positive and negative directional indicators: the positive reading higher implies an uptrend, while the negative reading higher or equal implies a downtrend. The output is smoothed and displayed as a directional oscillator.

The accompanying guidance suggests checking lower and higher chart intervals for agreement with the trading timeframe, and notes that the displayed status is offset by eight periods. These rules are heuristic thresholds, not evidence of predictive performance. The sideways rule uses an OR condition, so either low volatility or weak ADX is sufficient to suppress a directional classification; different settings may label the same price action differently. The document provides no backtest, asset-specific calibration, or trading rules for entries, exits, and risk.

Key ideas

• The indicator separates sideways markets from directional trends using ATR and ADX.
• ATR below its 20-period average is treated as evidence of sideways movement.
• ADX at or below 25 also classifies conditions as sideways.
• When conditions are not sideways, positive and negative directional indicators determine direction.
• Multi-timeframe agreement is suggested, but no performance evidence or trading plan is supplied.

Tags

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