ADX Overview

The Average Directional Index (ADX) measures trend strength on a 0-100 scale without indicating direction — telling you how strong a trend is, not whether it’s up or down. ADX above 25 indicates a strong trend, below 20 suggests a ranging market.

ADX is derived from the Directional Movement System (+DI/-DI), which measures the difference between consecutive highs and lows. The ADX line smooths this measurement to produce a reliable trend strength reading.

---

How Average Directional Index Works

Core Concept

1. Calculate +DM/-DM: Compare current high/low to previous high/low
2. Smooth with RMA: Apply RMA smoothing to directional movement
3. Calculate +DI/-DI: Normalize by Average True Range
4. Calculate DX: |+DI - -DI| / (+DI + -DI) × 100
5. Smooth DX to ADX: Apply RMA to DX for final ADX value

Key Characteristics:

• Direction-Agnostic = Measures trend strength only, not direction
• Bounded 0-100 = 0 = no trend, 100 = extremely strong trend
• Lagging by Design = Double smoothing makes ADX confirm trends after they start
• Universal Filter = ADX > 25 is the most widely used trend strength filter

Visual Interpretation

ADX Behavior:

• ADX rises when a trend (up or down) is strengthening
• ADX falls when the trend is weakening or market is consolidating
• ADX > 25 = strong trend (trade trend-following strategies)
• ADX < 20 = no trend (trade mean-reversion strategies)
• ADX doesn’t indicate direction — combine with +DI/-DI or moving averages for direction

---

Trading Signals Available on Reversion

These are the signal names you select when configuring ADX in the algorithm builder or via the MCP agent:

Signal	Triggers When	Typical Use
adx_above_threshold	ADX value rises above threshold (e.g., 25)	Trend is strong — enable trend-following strategies
adx_below_threshold	ADX value falls below threshold (e.g., 20)	Market is ranging — enable mean-reversion strategies
adx_above_signalLine	ADX crosses above its signal line	Trend strength increasing
adx_below_signalLine	ADX crosses below its signal line	Trend strength decreasing

Display: Separate pane

Category: Momentum

Threshold range: 0 – 100

---

Key Characteristics

Strengths

What Average Directional Index Does Well:

• Best Trend Strength Indicator: ADX is the gold standard for measuring whether a trend exists
• Universal Filter: ADX > 25 filter improves almost any trend-following strategy
• Direction Agnostic: Measures strength regardless of direction — versatile
• Very Stable: Double smoothing prevents false signals

Limitations

What to Watch Out For:

• No Direction: You need separate indicators for trend direction
• Significant Lag: Double smoothing means ADX confirms trends late
• Stays Elevated: ADX can remain high even as the trend reverses
• Static Thresholds: 25/20 levels may need adjustment for different assets

Best Use Cases

When to Use Average Directional Index:

• Trend Filter: Filter any strategy — trend-following when ADX > 25, mean-reversion when ADX < 20
• Strategy Selector: Switch between strategy types based on ADX level
• Signal Confirmation: Validate trend signals from other indicators

When NOT to Use Average Directional Index:

• Timing Entries: ADX lags too much for precise entry timing
• Direction Signals: ADX alone can’t tell you which way to trade

---

Note

Pro Tip: ADX is most valuable as a filter, not a signal. The single most impactful improvement to most strategies is adding adx_above_threshold (25) to Required conditions for trend-following, or adx_below_threshold (20) for mean-reversion. This one filter can significantly improve win rates by ensuring your strategy matches the current market regime.