The average directional index or ADX is used to determine how strong a trend is. It provides the trader with a reading ranging from 0 to 50.
The ADX is very useful in helping you gauge the strength of the trend. This is beneficial if you are a trend trader and are looking for strong trends which can offer high probability trades. It is important to note that the ADX does not provide buy or sell signals.
Let’s now look at the ADX readings and what they can tell us.
As a trend follower, you would want to see a reading of above 25 as this signals a strong trend. However, once the indicator reading is over 50, caution should be taken as the trend is considered extended and the market can very often pull back from extremes.
Here is the aftermath ->
It is important to note that the effect of the D+ and the D- lines are usually not noticeable when the period settings are adjusted as the overall reading is the same.
In this example, you can clearly see the D- line (red line) is above the D+ line (green line), which indicates a upward trend regardless of the differences in period settings made to the indicator.
When changing the parameters of the ADX, it is important to test whether your changes are actually improving or worsening the results of your strategy.