The ADX indicator is a tool used to measure the strength of a trend and can be very useful to determine if a trend is strong or weak. High readings indicate a strong trend and low readings indicate a weak trend. A trading range is likely to develop when the trading range is showing a low reading. So one should always avoid stocks with low readings.
ADX stands for Average Directional Index. On some charting packages there are two other lines on the chart, +DI and –DI (the DI part stands for Directional Indicator). Ignore these lines. If ADX is between 0 and 25 then the stock is in a trading range.
Once ADX gets above 25 then you will be seeing the beginning of a trend. Big moves tend to happen when ADX is right around this number.
When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend. One should be trading with these stocks.
You won’t see many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.
This indicator can be best used for screening stocks and writing scans. By adding this indicator to your scanning software, you can eliminate all of the stocks that are in trading ranges.
The ADX indicator does not give buy or sell signals. It does, however, give you some perspective on where the stock is in the trend. Low readings and you have a trading range or the beginning of a trend. Extremely high readings tell you that the trend will likely come to an end.