Chances are, at some point while trading, you’ve come across a trend and wondered: Is this a strong trend or just market noise? Well, in this post we’re going to look at an indicator that can really help us answer that question and improve our trading: the ADX (Average Directional Index).

While there are plenty of indicators that tell you where the market is moving, the ADX focuses on showing you how strong that trend is. That way, you can take advantage of strong moves and hop on the train before it takes off.

But let’s not waste any more time—let’s get right to it. We’ll start with a bit of background. A high ADX doesn’t mean the price will go up or down; it simply signals a strong trend. To know the direction, check the +DI and -DI lines.

ADX history

The ADX was developed by J. Welles Wilder in 1978, one of the most influential figures in the world of technical analysis to this day. He introduced the ADX in his book *“New Concepts in Technical Trading Systems”*, a work widely regarded as a cornerstone in the field. In that same book, he also presented other indicators we’ll explore in future posts, such as the RSI (Relative Strength Index), the Parabolic SAR, and the ATR (Average True Range).

All the indicators Wilder introduced remain relevant today, so it’s no surprise that the ADX is still one of the most reliable tools out there. What set Wilder apart from other approaches at the time was his practical and innovative mindset—he combined mathematical analysis with an intuitive perspective. These tools still form the backbone of many modern technical trading strategies.

His goal was to solve a critical problem: identifying when a trend is genuinely strong, avoiding sideways markets where traders often lose money. But how exactly did he help with ADX? Let’s dive in, starting with how the calculation is done.

Calculating the ADX

The ADX calculation is a bit more complex than other indicators, but don’t worry—most platforms do it for you (especially here at BlueCandle, where we’re all about making your life easier). While many might skip over this part, at BlueCandle we believe that understanding how the indicator works can give you an edge when using it. Don’t worry—we won’t dive deep into math formulas.

This indicator consists of three lines:

1. +DI (Positive Directional Indicator): Measures the strength of upward movements.
2. -DI (Negative Directional Indicator): Measures the strength of downward movements.
3. ADX (Average Directional Index): Measures the strength of the trend, regardless of whether it’s up or down.

As a general rule, here’s what you should keep in mind:

The calculation also involves three steps, as follows:

1. First, calculate the directional movements (+DM and -DM) by comparing the highs and lows of consecutive periods.
2. Then, the Smoothed Directional Movement Index (DX) is calculated by averaging the absolute values of +DI and -DI.
3. And finally, the ADX is obtained by applying a smoothing technique to the DX.

The result is a value ranging between 0 and 100, where a high number indicates a strong trend and a low number indicates a weak trend. Simple, right? Let’s see how this looks on a chart.

In the chart above, we see the ADX in red, +DI in blue, and -DI in orange. As observed, there are frequent crossovers between these lines that could be significant for our trading strategies. Now that we clearly understand what the ADX is, let’s explore how to trade with it.

Trading signals with ADX

As mentioned at the beginning of this post, ADX is one of the best tools for confirming trends and avoiding markets with unclear direction, which can become deadly traps for investors.

Signal #1: Trend Confirmation

As we’ve already mentioned, one of the key benefits of the ADX is identifying when a market is trending. But how do we see this on a chart? It’s quite simple, involving just two basic rules:

But we can also say the opposite

Looking back at the previous chart, we can clearly see market trends and how the ADX helps us confirm them.

Signal #2: Avoiding Sideways Markets

To identify a sideways market, simply check if the ADX is below 20. When this happens, the ADX indicates the market lacks sufficient strength for a trend, so it’s best to avoid trend-following strategies in these cases.

Signal #3: Crossovers of +DI and -DI

The buy and sell signals provided by these indicators are as follows:

• Buy Signal: When +DI crosses above -DI and the ADX rises.
• Sell Signal: When -DI crosses above +DI and the ADX rises.

Combining ADX with other indicators

The ADX is excellent for combining with other indicators, as it tells you when it’s a good moment to follow a trend, making your trading robots more reliable.

ADX + Moving Averages

Moving Averages help identify the direction of a trend, making them a great choice to combine with ADX. The simplest approach is identifying trend direction using Moving Averages while the ADX confirms its strength.

• Bullish trend confirmation: ADX is above 20, and price is above the 50-period moving average.
• Bearish trend confirmation: ADX is above 20, and price is below the 50-period moving average.

ADX + RSI (Relative Strength Index)

Another great indicator to combine with ADX is RSI, indicating whether a market is overbought or oversold. You can combine them as follows:

• Buying opportunity: ADX above 20 and RSI indicates oversold conditions (below 30).
• Selling opportunity: ADX above 20 and RSI indicates overbought conditions (above 70).

Simple strategy with ADX in BlueCandle

Let’s see how an ADX-based strategy would look in BlueCandle, using ADX and Moving Averages. This strategy will only enter strong trends and avoid markets without clear direction.

Required indicators

The indicators we’ll use for this strategy are:

• ADX (14 periods)
• Exponential Moving Average (EMA 50)

Entry rules

This strategy will enter under these conditions:

• +DI crosses above -DI.
• ADX is above 20.
• Price is above EMA 50.

In BlueCandle, we would configure it as follows:

And with this, our entry strategy is ready to go.

Exit rules

This time we’ll keep it very simple, exiting only when the EMA 50 is above the closing price, configured in our platform as follows:

As you see, nothing complicated—just one step and ready to close our positions.

Backtesting

Let’s see the results we achieve with this brief backtest:

The results appear quite promising.

Conclusion

As you can see, it’s possible to create impressive strategies by knowing the market direction. Now you know: if you want to trade trends confidently and avoid losses in unclear markets, the ADX is an essential tool.

To use it confidently, remember these points:

• ADX measures trend strength, not direction.
• A low ADX (<20) indicates a non-trending market.
• When ADX exceeds 40, the trend is strong and tradable.
• Combining ADX with Moving Averages and RSI improves signal accuracy.

Now it’s your turn to further explore this fantastic indicator and see how you can enhance this strategy using other indicators. What are you waiting for? Jump in and crush the market!

Leave a comment and tell me: Have you used ADX before? What has your experience been like?