Average Directional Movement Index

FX Strategy Video > Forex Trading Indicators

The Average Directional Movement Index is an indicator used in Technical Analysis to find an objective value for the strength and potency of a trend. Abbreviated ADX, it is a non-directional indicator, so it will determine the strength of a trend no matter if it is up or down. The ADX usually appears in a chart window with two other lines known as the DMI (Directional Movement Indicators).  The ADX is simply a derivative of the relationship between the two DMI lines.

By using ADX, the trader can evaluate trend for true underlying strength and can help traders choose the strongest and most determined trends. The ADX also allows the trade to determine how long to let profits run based upon whether the trend is strong or not. This helps solve the dilemma that many traders face – when to get out of a trade.

While the ADX doesn’t necessarily determine the trend itself, it allows the trader to understand with confidence how strong the perceived trend on a chart is likely to be. By adding the DMI lines, you can use them to determine the trends by themselves, but most traders will simply use the ADX line itself, with another indicator like a moving average to determine trend and strength. As the values of the ADX line increase, it shows that the trend’s strength is also increasing. Also, once the ADX gets over 40, it shows that perhaps the trend is getting overextended.

The ADX is considered by most traders to be a secondary indicator, meaning it is rarely ever used alone. (In fact it was originally part of a multi-indicator system developed in 1978 by J. Welles Wilder.) Because of this, you will almost always see it as part of a larger and more complex trading system as it doesn’t offer much beyond the ability to determine how likely a movement is going to continue, but doesn’t determine the direction or move itself.

Published on 17th of June 2011
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