How to Use ADX Average Directional Indicator

by C. Taylor

The Average Directional Index (ADX) offers an indication of market trends and their prevailing strength. This indicator offers no information as to the direction of stock price movements; it only gauges the strength of the trend, whether it be up or down. Low ADX figures means the stock is experience erratic movements that aren't really going anywhere and are hard to predict. However, a rising ADX indicates a building trend that can gain momentum in its current direction.

1. Watch the ADX of a stock you are considering for investment.

2. Avoid the stock if the ADX figure is below 25. This means the stock is experiencing weak, sideways movements with no definitive direction.

3. Reference the stock chart when the ADX figure reaches 30 and look at the current direction. If the stock chart shows an upward movement, purchase the stock. If it shows a downward movement, short the stock. An ADX around 30 indicates a strong trend, which is likely to continue.

4. Get out of your position whenever the ADX reaches 50. This figure indicates the trend is coming to an end and may reverse direction.

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