ADX and DMI (trend strength)

What it is

J. Welles Wilder introduced the directional movement system in 1978. +DI measures upward movement (today's high above yesterday's), −DI downward movement, both smoothed and divided by the average true range. ADX is a smoothed average of the gap between them, so it measures trend strength, not direction.

A common rule of thumb: ADX above about 25 means a trending market, below about 20 a ranging one. +DI above −DI says buyers have the upper hand.

How to spot it

• ADX rising from below 20 to above 25: a trend is starting.
• +DI and −DI crossing.

How to use it

• Use it as a filter: trade breakouts and pullbacks when ADX is high, and fade range edges when it's low.
• In a backtest, split results by ADX to see which conditions your strategy needs.

Common mistakes

• Reading a high ADX as bullish; it's just as high in a strong downtrend.
• Expecting it to warn early; it lags.

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