ADX — Average Directional Index
The ADX is the reference indicator for measuring trend strength, independent of its direction. Developed by J. Welles Wilder, it answers a single question: "is the market trending, or consolidating?". It's an essential filter: applying a trend-following strategy on a pure ranging asset produces repeated false signals.
Definition and formula
The ADX is computed from two directional components, +DI (bullish Directional Indicator) and −DI (bearish), smoothed over 14 periods:
ADX = smoothed moving average of DX over 14 periods
The ADX ranges between 0 and 100. It never says whether the trend is bullish or bearish — for that, you check whether +DI is above or below −DI. The ADX alone is purely scalar ("are we trending?").
How to read the ADX
Classic thresholds
- ADX < 20 — no trend. Range market, sideways oscillations. Trend-following strategies fail, range-bound strategies (mean reversion, support/resistance) are preferable.
- ADX between 20 and 25 — emerging trend. Uncertainty zone: the trend may install or fade. To monitor with other confirmations.
- ADX between 25 and 40 — solid trend. Optimal zone for momentum and trend-following strategies. Pullbacks offer entry points.
- ADX > 40 — strong or extreme trend. Accumulated performance is high, reversal risk grows. Trailing stop recommended.
- ADX > 60 — exceptional trend, rare. Statistically non-sustainable beyond a few weeks.
+DI and −DI: direction
Once strength is confirmed by the ADX, the +DI / −DI pair gives direction:
- +DI > −DI: dominant buying pressure (uptrend).
- −DI > +DI: dominant selling pressure (downtrend).
- +DI crossing above −DI with ADX rising: classic long entry signal.
Cash Scanner doesn't trade mechanically on these crossovers — they serve as a coherence filter with other signals (RSI, MACD, divergences).
How Cash Scanner uses ADX
The ADX enters the /100 score primarily as a signal quality filter:
- Momentum mode: ADX > 25 confirms that the momentum captured by RSI / MACD is carried by a real trend, not range noise. Significant score boost.
- Phoenix mode: conversely, a low ADX (< 20) signals favorable ground for mean-reverting rebounds — Phoenix values these conditions.
- Direction confluence: a buy signal (e.g., RSI oversold exit) gains credibility if +DI > −DI and ADX > 20.
Limits and common pitfalls
- The ADX lags price: smoothed moving average over 14 days, it confirms the trend rather than anticipating it. Useless for precise entry timing.
- Falling ADX ≠ reversal: an ADX rolling over from a peak means the trend is fading, not reversing. Price may consolidate without inverting.
- False signals in tight range: with ADX < 15, +DI / −DI oscillations generate repeated crossovers with no predictive value.
- Period 14 vs 7 vs 21: 14 is the swing trading optimum. Shorter = reactive but noisy. Longer = increased lag, signal too late.