The average directional index (ADX) may be a technical analysis indicator employed by some traders to work out the strength of a trend.
The trend can be either up or down, and this is shown by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+DI). Therefore, the ADX commonly includes three separate lines. These are wont to help assess whether a trade should be taken long or short, or if a trade should be taken in the least.
The ADX, negative directional indicator (-DI), and positive directional indicator (+DI) are momentum indicators. The ADX helps investors determine trend strength, while -DI and +DI help determine trend direction.
The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy. On the other hand, if the -DI crosses above the +DI, and the ADX is above 20 or 25, then that is an opportunity to enter a potential short trade.
Crosses can also be used to exit current trades. For example, if long, exit when the -DI crosses above the +DI. Meanwhile, when the ADX is below 20 the indicator is signaling that the price is trendless and that it might not be an ideal time to enter a trade.