Check out how to use the ADX indicator Strategy for better trading results

## Understanding the ADX Indicator: Formula and Interpretation

The ADX indicator measures the strength of a trend and can help determine when the market is ranging or trending. To calculate the ADX, you’ll need values for the +DI and -DI.

### Calculating the +DI and -DI

The +DI measures upward price movement, while the -DI measures downward price movement. To get these values:

1. Calculate the high-low range: Subtract the lowest low from the highest high for a given period.
2. Calculate the positive directional movement (+DM) and negative directional movement (-DM): The +DM is the portion of the range where the current high is greater than the previous high. The -DM is the portion of the range where the current low is less than the previous low.
3. Calculate the smoothed positive and negative directional indicators (+DI14 and -DI14): Divide the +DM and -DM by the 14-period atr (average true range), then smooth using a 14-period moving average.
4. The +DI and -DI values range from 0 to 100, with higher values indicating a stronger trend. When the +DI is greater than the -DI, prices are trending up. When the -DI is greater than the +DI, prices are trending down.

The ADX value itself ranges from 0 to 100. A higher ADX means the trend is stronger, while a lower ADX means the market is ranging. Typically:

•ADX below 20: weak or ranging trend.

•ADX between 20 to 50: strong trend.

•ADX above 50: very strong trend.

The ADX indicator can be a useful tool for intraday traders looking to trade with the trend. By analyzing the +DI, -DI, and ADX values together, you’ll get a good sense of when the market is ranging or trending, so you know the right times to buy or sell.

To effectively use ADX indicators for intraday trading, you’ve got to know what you’re looking for. The ADX measures the strength of a trend, so higher ADX values mean a stronger trend, either up or down. For intraday trading, look for ADX values above 25, which show a strong trend is in play.

Once you spot a high ADX, check which direction the trend is going. If +DI is above -DI, it’s an uptrend; if -DI is higher, it’s a downtrend. Look for the trending indicator (either +DI or -DI) to be rising too, not falling. That confirms the trend has momentum.

### Look for entry points

With an uptrend confirmed, look for opportunities to buy when the stock pulls back a bit. You want to see the +DI line stay above -DI, showing the uptrend is still intact. Wait for the stock to start rising again, then buy. For downtrends, do the opposite—sell short when -DI stays strong and the stock drops lower.

### Set stop losses

With volatile intraday moves, it’s important to set stop losses. For buys, place a stop loss order below the previous minor swing low. For shorts, place a stop loss above the previous minor swing high. Lock in profits by trailing your stop loss up/down as the trend continues.

The key is not to get in too late. Look for high ADX values and a strong trend early in the day. Then ride the wave using trailing stop losses to maximize profits. By following the ADX indicators closely, you’ll know when the trend starts to fade so you can exit before reversals hit. With some practice, this strategy can lead to nice gains in a short time frame.

For day trading using the ADX indicator, the following settings and signals will serve you well:

### Timeframe

Use the 5-minute chart for active day trading. This allows you to see short-term trends and exit positions quickly. For less active trading, 15-minute charts can also work. Stick to intraday charts—the ADX indicator works best for short-term momentum, not long-term trends.

Look for ADX readings above 25, which signal a strong trend is in place. As ADX climbs from 25 to 50, the trend is gaining strength. Above 50 means an extremely strong trend. When ADX starts dropping from above 25, it usually means the trend is weakening or reversing.

• Buy Signal: When +DI crosses above -DI and ADX is above 25, it signals a strong upward trend. Go long.
• Sell Signal: When -DI crosses above +DI and ADX is above 25, it signals a strong downward trend. Go short.

Exit a trade when ADX drops back below 25, indicating trend momentum is slowing. Or use a trailing stop to lock in profits as the trend continues.

The ADX indicator can be highly effective when used properly for day trading. Be sure to always use stop losses, as trends can reverse quickly. And avoid going against the trend—only take buy signals when the trend is up, and sell signals when the trend is down. With practice, the ADX indicator can become a key tool in your day trading arsenal.

## Test

What are the components of ADX?

*MI/*MU
UX/UI
POV/FYI
+DM/-DM
That’s right!