Average directional index (ADX)

Developed by Welles Wilder alongside the average true range, the calculation runs in three stages. Each bar's high and low are compared with the previous bar's to establish whether the move was upward or downward, producing positive and negative directional movement. Each is smoothed and divided by the average true range to give the positive and negative directional indicators, which are on a comparable scale across instruments. The directional index is the absolute difference between those two indicators as a proportion of their sum, and ADX is that value smoothed again.

Direction is read from the two directional indicators, never from ADX itself, which is a magnitude and rises as strongly in a sustained fall as in a sustained rise. The conventional thresholds describe a reading above twenty five as a trending market and one below twenty as a range. Those numbers come from the author's original presentation and are conventions rather than findings, and traders routinely vary them by instrument and timeframe without any agreed basis for the choice.

The main limitation follows from the construction. ADX is a smoothed measure of a smoothed measure, so it responds slowly and confirms a trend well after it began. Practitioners disagree over what a falling ADX means: one reading treats it as a trend weakening, another points out that it only reports that directional movement has stopped increasing, which can happen in a move that continues steadily.