What it means
ADX (Average Directional Index) measures TREND STRENGTH without indicating direction. Scaled 0-100. Created by J. Welles Wilder Jr. in 1978. Combined with two directional components: +DI (positive directional indicator, upside strength) and -DI (negative, downside strength). When +DI > -DI: uptrend. When -DI > +DI: downtrend. ADX above 25 = strong trend; below 20 = weak or ranging; rising = trend strengthening; falling = trend weakening.
Why it matters
ADX answers the most fundamental question: 'is there a trend?' Many strategies work in trends, others in ranges — using a strategy in the wrong regime is the dominant cause of system underperformance. ADX filtering ensures trend-following strategies activate only when trends are present and mean-reversion strategies activate only in ranges.
How to use it
Use ADX as a regime filter. Trend-following systems: only take signals when ADX > 25. Mean-reversion systems: only take signals when ADX < 20. Combine with +DI/-DI for direction. ADX rising from below 20 above 25 marks transition from range to trend — often a high-conviction signal.
BTC March-July 2024: ADX above 25 throughout (strong trend). +DI > -DI = uptrend confirmed. Daily ADX peaked at 38 in mid-March (extreme trend strength). Subsequent decline in ADX to 22 in July signaled trend weakening — preceded the August correction.
Want a worked example or a deeper dive? Ask Rocky how this concept applies to your specific watchlist or trade idea.
Ask Rocky