About ADX

This portion is from stockcharts:-

J. Welles Wilder developed the Average Directional Index (ADX) in order to evaluate the strength of the current trend, be it up or down.

It's important to detemine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.

ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing

ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI). +DI measures the force of the up moves and -DI measures the force of the down moves over a set period.

In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Be careful, though; when a security is in a trading range, this system may produce many whipsaws.

As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.ADX combines +DI with -DI and then smooths the data with a moving average to provide a measurement of trend strength. Because it uses both +DI and -DI, ADX does not offer any indication of trend direction, just strength. Generally, readings above 40 indicate a strong trend and readings below 20 a weak trend. To catch a trend in its early stages, you might look for stocks with ADX that advances above 20. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range may develop.

ADX is well explained in Alexander Elder’s book “Trading for a living”