ADX and DMI: measuring trend strength without predicting direction

What it measures

ADX measures how strongly a market is trending, in either direction. The two directional indicators, +DI and −DI, carry the direction; ADX itself is direction-blind and only says how decisive the movement has been.

That separation is the point: ADX is most useful as a filter that decides which of your other tools to trust, rather than as a signal in itself.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   For each bar, compute directional movement: the up-move is this high minus the previous high, the down-move is the previous low minus this low. Only the larger one counts, and only if it is positive — a bar registers one or the other, never both.

2. 2

   Smooth the up-moves, the down-moves and the true range separately with Wilder’s method.

3. 3

   Divide the smoothed up-moves by the smoothed true range for +DI, and the smoothed down-moves by it for −DI.

4. 4

   Compute DX as the absolute difference between the two directional indicators divided by their sum, as a percentage.

5. 5

   Smooth DX with Wilder’s method again. That second smoothing is ADX.

Settings

Fourteen for both the directional smoothing and the ADX smoothing is standard. Raising the ADX smoothing alone makes the trend-strength reading steadier without changing the directional crossovers.

How to read it

• ADX below 20 is a market without a trend, and trend-following tools will lose money in it. ADX above 25 is a trend worth following.
• ADX rising means the trend is strengthening whichever way it points. ADX falling from a high level means the trend is losing conviction, not that it is reversing.
• +DI above −DI is an up-trend, and the crossover is the directional signal. ADX only tells you whether that signal is worth acting on.
• Because ADX is smoothed twice it is slow. It confirms; it never leads.

Where it misleads

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