ADX and Directional Movement (DMI)

The Directional Movement system answers two questions: is there a trend, and which way does it point? J. Welles Wilder introduced it in 1978. It has three lines: the Positive Directional Indicator (+DI), the Negative Directional Indicator (−DI), and the Average Directional Index (ADX), which measures trend strength regardless of direction.

How it is calculated

For each bar, compare today’s range with yesterday’s:

+DM = High - Previous high     if it is positive and larger than (Previous low - Low), otherwise 0
-DM = Previous low - Low       if it is positive and larger than (High - Previous high), otherwise 0

+DI = 100 × smoothed(+DM) / ATR
-DI = 100 × smoothed(-DM) / ATR
DX  = 100 × |+DI - -DI| / (+DI + -DI)
ADX = smoothed DX                  (all smoothing uses Wilder's method, usually 14 bars)

+DI shows how much of the recent range came from upward moves, and −DI how much from downward moves. ADX rises when one side clearly dominates and falls when the two are balanced.

How to read it

• Trend strength. ADX above 25 indicates a trending market, above 40 a strong trend. Below 20 the market is trendless, and trend-following signals tend to fail.
• Direction. ADX doesn’t show direction. Use the DI lines: +DI above −DI means the trend is up, −DI above +DI means it is down.
• DI crossovers. +DI crossing above −DI is Wilder’s buy signal, and the reverse his sell signal. They are more reliable when ADX is above 20 to 25 or rising.
• Rising versus falling ADX. A rising ADX means the trend is gaining strength. A falling ADX from a high level means the trend is maturing or pausing, even if prices are still moving in its direction.
• Choosing a strategy. Many traders use ADX as a switch: trend-following tools (moving averages, breakouts) when ADX is high, oscillators (RSI, stochastic) when it is low.

Settings and common mistakes

• Settings. 14 bars is standard. Shorter periods make ADX more responsive and noisier.
• Reading a high ADX as bullish. A strong downtrend also has a high ADX. Always check the DI lines.
• Expecting early signals. ADX is a double-smoothed indicator and lags. It confirms trends rather than predicting them.

Live chart: SPY (S&P 500 ETF), daily, with ADX(14). The chart updates every trading day.

Screen for it on MarketInOut

Our formula language has adx(period), dip(period) for +DI and dim(period) for −DI. Stocks in a strong uptrend:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and adx(14) > 25 and dip(14) > dim(14)

A fresh bullish DI crossover with a trend already forming:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and dip(14) ca dim(14) and adx(14) > 20

Related: Average True Range, Moving averages, MACD.