Indicators

ADX (Average Directional Index)

Measures trend strength (not direction) on a 0-100 scale -- DI+/DI- for direction, and the classic ADX/DI trading system.

What is the Average Directional Index?

ADX measures how strongly the market is trending -- regardless of whether the trend is up or down. It answers the question: "is there a meaningful trend right now, or is the market moving sideways?"

ADX reads on a scale from 0 to 100. A high ADX means the market is trending strongly. A low ADX means the market is directionless or ranging. ADX does not tell you which direction the trend is going -- for that, you need the companion +DI and -DI lines, which come bundled with ADX in Simula.

ADX was developed by J. Welles Wilder (the same person who created RSI and Parabolic SAR) as part of his Directional Movement System.

Reading ADX Levels

Below 20
The market is ranging or has no clear trend. Trend-following strategies are likely to produce false signals in this environment.
20 to 25
A potential trend may be starting, but it is not yet confirmed. This is a transitional zone.
25 to 50
A meaningful trend is in progress. The higher the value, the stronger the trend. Most trend-following strategies work well in this range.
50 to 75
A very strong trend. These readings are less common and usually occur during significant market moves.
Above 75
An extremely strong trend. Rare in practice. When ADX reaches this level, the trend may be nearing exhaustion -- but ADX does not predict reversals, only measures current strength.
25DI crossoverTrend reverses directionADX high (strong uptrend)ADX rises (strong downtrend)ADX (trend strength)+DI (bullish)-DI (bearish)
ADX measures strength, not direction. When -DI crosses above +DI, the trend reverses from up to down -- but ADX remains high because the downtrend is also strong.
ADX does not show direction
A rising ADX with a falling price means the downtrend is getting stronger, not that the price is going up. A falling ADX with a rising price means the uptrend is weakening. Always check +DI/-DI or the price itself to determine direction.

The +DI and -DI Lines

In Simula, selecting ADX automatically includes two additional lines: +DI (Plus Directional Indicator) and -DI (Minus Directional Indicator). These provide the direction that ADX alone does not show:

+DI above -DI
Upward price movement is stronger than downward movement. The greater the gap, the more dominant the upward pressure.
-DI above +DI
Downward price movement is stronger than upward movement. The greater the gap, the more dominant the downward pressure.
DI crossover
When +DI crosses above -DI, it signals a potential shift to an uptrend. When -DI crosses above +DI, it signals a potential shift to a downtrend.

The ADX/DI Trading System

The classic approach combines ADX for trend strength with DI crossovers for direction:

Entry: Wait for +DI to cross above -DI (bullish) or -DI to cross above +DI (bearish). Then confirm that ADX is above 25 (a real trend is present). Without the ADX filter, DI crossovers produce many false signals during ranging markets.

Exit: When ADX starts to decline from a high level, the trend may be losing steam. Some traders exit when ADX drops below 25 or when the DI lines cross in the opposite direction.

How It's Calculated

ADX is built from the Directional Movement (DM) system in several steps:

1. Directional Movement (+DM, -DM): On each candle, compare the current high to the previous high (+DM) and the current low to the previous low (-DM). The larger movement wins; the smaller is set to zero.

2. True Range: The greatest of: current high minus current low, current high minus previous close, or previous close minus current low. This accounts for gaps.

3. Directional Indicators (+DI, -DI): Smooth +DM and -DM using Wilder's smoothing, then divide each by the smoothed True Range and multiply by 100. This normalizes the directional movement relative to the overall price range.

DX (Directional Movement Index)
DX = |+DI - (-DI)| / (+DI + (-DI)) * 100

4. ADX: Apply Wilder's smoothing to DX. The smoothing makes ADX less volatile than raw DX, giving a cleaner trend-strength reading.

ADXR (ADX Rating)

ADXR is a smoothed version of ADX. It averages the current ADX with the ADX value from N periods ago. This makes ADXR even slower to react than ADX but also more stable. It is available as a separate indicator in Simula and is also output automatically when you select ADX.

Things to Watch Out For

ADX lags behind trend changes

Because ADX is double-smoothed (DI smoothing + ADX smoothing), it reacts slowly to trend changes. By the time ADX rises above 25 to confirm a trend, a significant portion of the move may have already occurred. Conversely, ADX may stay elevated for several candles after a trend has ended.

A falling ADX does not mean reversal

When ADX declines from a high level, it means the trend is weakening -- not that the price is reversing. The price may simply transition from a strong trend to a weaker trend or a range. A trend reversal requires a new directional move, which would eventually be reflected in a DI crossover and a new ADX rise.

Where to Go Next

MACD -- a trend/momentum indicator that shows both direction and momentum.

RSI -- another Wilder indicator, measuring overbought/oversold conditions.

Trend Indicators Overview -- all 12 trend indicators available in Simula.

Trend Following -- strategies that use ADX to filter trend signals.