How to Use Average Directional Movement Index (ADX) to Determine Trends

The Average Directional Movement Index (ADX) line, developed by J. Welles Wilder,  helps determine whether a market is in a trending or a trading phase. It measures the magnitude of trend or direction in the market.

A rising ADX line suggests  a strong trend while a declining ADX line suggests a trading market.   By plotting the direction of the ADX line, the trader is able to determine whether the market is trading or trending and also identify potential changes in the market from trading to trending.

Look at the example below.  Note that the ADX line trending up or down does not indicate bullish or bearish sign.  ADX simply indicates the strength of the trade, so don’t get confused by it.

Bottom line, ADX is one of the best indicators out there to help you determine whether the market is trending or trading.  If the market is trending bullish, you’re better off going long.  If the market is trending bearish, you may want to stay away or even short the stocks.  If the market is trading, expect more volatility in the stock price and expect the market to swing up and down.