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Reversion
Indicators

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

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

Section titled “How Average Directional Index Works”

Core Concept

Section titled “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

Section titled “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

Section titled “Trading Signals Available on Reversion”

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

SignalTriggers WhenTypical Use
adx_above_thresholdADX value rises above threshold (e.g., 25)Trend is strong — enable trend-following strategies
adx_below_thresholdADX value falls below threshold (e.g., 20)Market is ranging — enable mean-reversion strategies
adx_above_signalLineADX crosses above its signal lineTrend strength increasing
adx_below_signalLineADX crosses below its signal lineTrend strength decreasing

Display: Separate pane

Category: Momentum

Threshold range: 0 – 100

Key Characteristics

Section titled “Key Characteristics”

{% tabs %} {% tab title=“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 {% endtab %}

{% tab title=“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 {% endtab %}

{% tab title=“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 {% endtab %} {% endtabs %}