What it is
The Average Directional Index, another Wilder construction from 1978, quantifies how strong a trend is without saying which way it points. It runs from 0 to 100 and is normally plotted alongside the two directional indicators it is derived from, +DI and -DI.
How it works
Each bar's directional movement is the part of its range that extends beyond the previous bar: upward movement if the new high exceeds the old high by more than the new low undercuts the old low, downward movement in the opposite case, and zero when neither dominates. Those values are smoothed and divided by ATR to give +DI and -DI as percentages. DX is 100 x the absolute difference between the two divided by their sum, and ADX is Wilder's smoothed average of DX, conventionally over 14 periods.
How traders use it
The common convention is that ADX below about 20 describes a rangebound market and above about 25 a trending one, with readings over 40 marking a strong directional move. Its main practical use is as a strategy switch: run breakout and trend-following logic when ADX is rising above the threshold, and mean-reversion logic when it is low and flat. The relationship between +DI and -DI supplies the direction that ADX itself does not.
Where it breaks down
Because DX is smoothed twice before it is plotted, ADX turns well after the move it is describing and is close to useless for timing an entry. The single most frequent misreading is treating a rising ADX as bullish: it rises just as readily during a collapse, since it measures the magnitude of directional movement and not its sign. Always read it together with the DI lines or an independent directional filter.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.