To use ADX to determine Trend Direction, it is combined with the Directional movement +DI and -DI. +DI shows an uptrend on the indicators and -DI shows a downtrend.
In general, the bulls have the edge when +DI is greater than -DI, while the bears have the edge when -DI is greater.
After the cross of these indicators (-DI and +DI), we are able to tell the direction of the trend on the market chart.
The Average Directional Index (ADX) is used to measure the strength or weakness of a trend, not the actual direction.
How to interpret the ADX indicator with +DI and -DI on the Chart
The ADX fluctuates from 0 and 100.
When the reading is below 20, it indicates very week or no trend.
ADX Values between 20 and 50 signal a trending market.
Values between 50 and 75 very strong trends
When the +DI is above the -DI, buying is stronger than selling hence strong uptrend.
On the other hand, when -DI is above the +DI, selling is stronger than buying, strong downtrend.
However, at the crossovers of +DI and -DI,the ADX indicator should be above 20 for a trending market.
How to use ADX to determine the direction of a trend
ADX Showing Uptrend
Let’s take a look at the AUDJPY 4-Hour chart below and see how this indicator works.
From the above chart, ADX is represented by the Blue line, +Dl is the Green line and -DI the Red line.
As the ADX indicator read values above 20 (pink color), it indicated a strong uptrend and as it read values below 20 (light blue), it indicates a ranging market or a very weak trend.
Therefore bearing that in mind, you should be able to tell whether the market is trending or ranging.
The +D line indicate an uptrend and when above -D line, it signals a strong uptrend.
The -D line indicates a downtrend and when the -D line (red) is above the +D line(green), it signals a strong downtrend.
In this case, the ADX line stayed above 20 most of the time with the green line +DI following. This is an indication for a strong uptrend in the period. Once more, Take a look at the above chart.
ADX to identify trending market in a downtrend.
When ADX is above 20, it indicates a trending market. The -DI line on the indicator above +DI shows a downtrend.
You can clearly see from the candlestick chart above that price is in a strong downtrend.
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