Average Directional Index (14)

The Average Directional Index (14) is a trend indicators indicator used in Skyrexio Strategy Builder for trend strength measurement and direction identification.

Introduction

The Average Directional Index (ADX) is a trend strength indicator that measures the intensity of trending conditions without regard to direction. ADX is context-dependent - it identifies when markets are trending strongly (ADX > 25) versus ranging (ADX < 20), helping traders select appropriate strategies. This indicator is essential for determining whether to use trend-following or mean-reversion approaches.

How Average Directional Index (14) Works

ADX was developed by J. Welles Wilder Jr. as a smoothed version of the Directional Index (DX). It measures trend strength by analyzing the relationship between positive and negative directional movement over time. The calculation involves smoothing the DX values over 14 periods to create a more stable trend strength measurement.

Key characteristics of ADX:

• Pure trend strength measurement - Shows intensity of trending conditions regardless of direction • Bounded oscillator - Values range from 0 to 100, with clear thresholds for interpretation • Lagging indicator - Confirms trend strength after it has developed • Strategy selector - Helps choose between trend-following and mean-reversion approaches • Market phase identifier - Rising ADX indicates strengthening trends, falling ADX indicates weakening trends

Market Psychology: ADX measures the conviction behind price movements. High ADX values indicate strong directional agreement among market participants, while low ADX values suggest indecision and choppy price action. This makes ADX invaluable for strategy selection.

Key Characteristics

Attribute
Details

Category

Trend Indicators

Type

Trend Strength Measurement

Primary Use

Strategy selection based on trend strength

Timeframe

All timeframes supported (1m to 1M)

Confirmation

Directional indicators (+DI, -DI), volume

Strategy Applications

🟢 LONG STRATEGY (Context-Dependent)

ADX is context-dependent for LONG strategies. Use LONG entries when ADX > 25 confirms strong uptrends, or when ADX < 20 identifies ranging conditions suitable for mean-reversion buying.

Base Entry Order (LONG) - Trend Following

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 25

AND

First Condition: Plus Directional Indicator (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Minus Directional Indicator (14)
Timeframe: 1H

Base Entry Order (LONG) - Mean Reversion

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 20

AND

First Condition: RSI
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 30

Additional Entry Orders (LONG)

Additional Entry 1: Trend strength increasing
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

OR

Additional Entry 2: Support level bounce in ranging market
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 25

AND

First Condition: Close Price
Timeframe: 1H
Operator: Greater Than
Second Condition: Bollinger Bands Lower (20, 2)
Timeframe: 1H

Take Profit Orders (LONG)

Rule 1: Exit condition - Trend strength weakening
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 20

OR

Rule 2: Exit condition - Overbought in strong trend
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 40

AND

First Condition: RSI
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 75

OR

Rule 3: Exit condition - Directional momentum shifting
First Condition: Plus Directional Indicator (14)
Timeframe: 1H
Operator: Cross Below
Second Condition: Minus Directional Indicator (14)
Timeframe: 1H

Stop Loss Orders (LONG)

Rule 1: Stop loss - Trend strength collapsing
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 15

OR

Rule 2: Stop loss - Bearish directional shift confirmed
First Condition: Minus Directional Indicator (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Plus Directional Indicator (14)
Timeframe: 1H

AND

First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 20

OR

Rule 3: Stop loss - Volume confirms breakdown
First Condition: Volume
Timeframe: 1H
Operator: Greater Than
Second Condition: Volume Weighted Moving Average
Timeframe: 1H

🔴 SHORT STRATEGY (Context-Dependent)

ADX is context-dependent for SHORT strategies. Use SHORT entries when ADX > 25 confirms strong downtrends, or when ADX < 20 identifies ranging conditions suitable for mean-reversion selling.

Base Entry Order (SHORT) - Trend Following

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 25

AND

First Condition: Minus Directional Indicator (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Plus Directional Indicator (14)
Timeframe: 1H

Base Entry Order (SHORT) - Mean Reversion

Trigger Type: Once per bar close
Bar TF: 1H
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 20

AND

First Condition: RSI
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 70

Additional Entry Orders (SHORT)

Additional Entry 1: Trend strength increasing in downtrend
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Simple Moving Average (20)
Timeframe: 1H

AND

First Condition: Minus Directional Indicator (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Plus Directional Indicator (14)
Timeframe: 1H

OR

Additional Entry 2: Resistance rejection in ranging market
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 25

AND

First Condition: Close Price
Timeframe: 1H
Operator: Less Than
Second Condition: Bollinger Bands Upper (20, 2)
Timeframe: 1H

Take Profit Orders (SHORT)

Rule 1: Exit condition - Trend strength weakening
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 20

OR

Rule 2: Exit condition - Oversold in strong downtrend
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 40

AND

First Condition: RSI
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 25

OR

Rule 3: Exit condition - Directional momentum shifting
First Condition: Minus Directional Indicator (14)
Timeframe: 1H
Operator: Cross Below
Second Condition: Plus Directional Indicator (14)
Timeframe: 1H

Stop Loss Orders (SHORT)

Rule 1: Stop loss - Trend strength collapsing
First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Less Than
Second Condition: Value
Value: 15

OR

Rule 2: Stop loss - Bullish directional shift confirmed
First Condition: Plus Directional Indicator (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Minus Directional Indicator (14)
Timeframe: 1H

AND

First Condition: Average Directional Index (14)
Timeframe: 1H
Operator: Greater Than
Second Condition: Value
Value: 20

OR

Rule 3: Stop loss - Volume confirms breakout
First Condition: Volume
Timeframe: 1H
Operator: Greater Than
Second Condition: Volume Weighted Moving Average
Timeframe: 1H

Advanced Strategy Combinations

Multi-Timeframe ADX Analysis

Higher Timeframe Confirmation:

  • Daily: ADX > 25 (strong trend environment)

  • 4H: Directional bias confirmed (+DI vs -DI)

  • 1H: ADX execution signals + volume confirmation

ADX-Based Strategy Selection

Setup Process:

  1. Monitor ADX for trend strength assessment

  2. ADX > 25: Use trend-following strategies

  3. ADX < 20: Use mean-reversion strategies

  4. ADX 20-25: Wait for clearer conditions

Execution:

  • Base Order: ADX threshold + directional confirmation

  • Additional: ADX rising for trend strength

  • Take Profit: ADX weakening or extreme readings

  • Stop Loss: ADX collapse or directional reversal

Risk Management Guidelines

Position Sizing

Strategy Type
Position Size
Conditions

Trend Following

Standard

ADX > 25 with directional confirmation

Mean Reversion

Reduced (50-75%)

ADX < 20 in ranging markets

High ADX

Increase confidence

ADX > 40 shows very strong trends

Low ADX

Reduce size

ADX < 15 indicates choppy conditions

ADX Reliability Factors

✅ ADX > 25 with rising trend ✅ Clear directional bias (+DI vs -DI) ✅ Volume confirms directional movement ✅ Multi-timeframe alignment

Best Practices

For Trend Following Strategies

  1. Wait for ADX > 25 - Confirm strong trending conditions before entering

  2. Directional confirmation - Use +DI/-DI to determine trend direction

  3. Rising ADX - Prefer entries when ADX is increasing (strengthening trend)

  4. Volume validation - Confirm directional moves with volume analysis

For Mean Reversion Strategies

  1. ADX < 20 only - Only use mean reversion when ADX confirms ranging conditions

  2. Overbought/Oversold - Combine with RSI or other oscillators for timing

  3. Quick profits - Take profits faster in ranging markets

  4. Tight stops - Use closer stop losses due to unpredictable ranging action

Common Mistakes to Avoid

  • Ignoring direction - Using ADX without +DI/-DI directional confirmation

  • Fighting trends - Mean reversion when ADX > 25 shows strong trends

  • Neutral zone trading - Trading when ADX is between 20-25 (unclear conditions)

  • Lagging recognition - Not adapting quickly when ADX changes trend strength signals

Market Conditions Analysis

Market Type
Trend Following Effectiveness
Mean Reversion Effectiveness

Strong Uptrend

🟢 High (ADX > 25, +DI > -DI)

🔴 Low (fight the trend)

Strong Downtrend

🟢 High (ADX > 25, -DI > +DI)

🔴 Low (fight the trend)

Ranging

🔴 Low (ADX < 20)

🟢 High (buy low, sell high)

Choppy

🔴 Very Low (ADX < 15)

🟡 Medium (careful timing)

Volatile Trending

🟢 High (ADX > 40)

🔴 Very Low (strong momentum)

Related Indicators

Indicator
Relationship
Link

Plus Directional Indicator

Shows bullish trend strength

Plus Directional Indicator (14)

Minus Directional Indicator

Shows bearish trend strength

Minus Directional Indicator (14)

Directional Index

Raw directional measurement

Directional Index (14)

ADXR

Smoothed ADX version

Average Directional Index Rating (14)

Conclusion

ADX is a context-dependent indicator that excels at identifying when to use trend-following versus mean-reversion strategies. Its primary value lies in measuring trend strength rather than providing directional signals, making it essential for strategy selection.

Key Takeaways

  • PRIMARY USE: Strategy selection based on trend strength (ADX > 25 = trend following, ADX < 20 = mean reversion)

  • SECONDARY USE: Trend strength confirmation and exit timing

  • ALWAYS: Combine with directional indicators (+DI/-DI) for complete analysis

  • REMEMBER: ADX is a lagging indicator - use for confirmation, not prediction

Success with ADX requires understanding that it measures trend strength, not direction. Use it to select the appropriate strategy for current market conditions, and always combine it with directional indicators for complete trend analysis.

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