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Average Directional Index (ADX) indicator
The ADX (Average Directional Index) is a technical indicator based on the stock price action. Unlike most indicators, it does not tell you which way a stock is going, it tells you how strongly it is going anywhere at all. It comes with two companion lines, DI+ and DI-, which supply the direction. You can read more about it on its Wikipedia page.
Why use it?
Most indicators answer "up or down?". ADX answers a question that comes before that one: "is this market trending, or is it going nowhere?" For options traders that question is often the more valuable of the two, because it decides which strategy fits the stock:
- Low ADX = sideways, range-bound market. These are the conditions premium-selling strategies are built for (iron condors, credit spreads, covered calls, short strangles). You get paid when the stock doesn't move.
- High ADX = strong, sustained trend. These are the conditions for directional trades (debit spreads, long calls and puts) and a warning sign for short-premium positions that need the stock to stay put.
Filtering by ADX removes the trades where the market environment is working against your strategy. You don't need to be right every time. You just need to raise your probability, and your expectancy goes up with it.
How to use the ADX indicator in Samurai
You can use the ADX indicator to:
- Find quiet, sideways stocks for range-bound and premium-selling strategies.
- Find stocks in a strong, confirmed trend and trade with it, bullish or bearish.
- Confirm or reject a signal from another indicator. An RSI oversold reading on a low
- ADX stock is a decent mean-reversion setup; the same reading on a high-ADX stock in a downtrend is often just a strong trend continuing.
- Add ADX as a column and sort by it to rank your trade opportunities (Pro tip: you can also save the scan).
The Filter
The ADX filter has two views.
Basic view gives you several ready-made conditions that combine strength and direction in one click:
- Any: no ADX condition.
- Sideways (ADX < 20): weak trend or no trend. The range-bound / premium-selling setting.
- Bullish (ADX ≥ 20, DI+ > DI-): a confirmed uptrend: the trend is strong enough to count, and it is pointing up.
- Bearish (ADX ≥ 20, DI- > DI+): a confirmed downtrend.
Advanced view lets you set strength and direction independently, so you can be more (or less) demanding than the presets:
- Strength: the From (ADX) and To (ADX) range.
- Direction: Any, Bullish (DI+ > DI-), or Bearish (DI- > DI+).
This separation is the point of the advanced view. Strength and direction are two different questions, and the best setups usually put a specific answer on each one. You can also answer only one of them: leave the From/To fields blank and the filter ignores trend strength entirely, returning every stock that matches the direction you chose.
Settings
Length: in days (default: 14, Wilder's original setting). During market hours, the current day is treated as a provisional bar (we use the latest traded price as the close, along with the running high and low of the forming bar) so ADX, DI+ and DI- update in real time. After the close, the official closing values are used for the day. A shorter length reacts faster but produces more false signals; a longer length is smoother and slower.
From (ADX) and To (ADX): the strength band you want the stock to be in, on the 0-100 scale. Both fields are optional, leave them blank to filter on direction alone. The conventional reading of the scale is:
- Below 20: no trend / sideways
- 20 to 25: a trend may be starting
- 25 to 50: a strong trend
- Above 50: a very strong trend, sometimes an over-extended one
Direction: compares the two directional lines. DI+ above DI- means buyers are in control (bullish); DI- above DI+ means sellers are (bearish). Direction is independent of strength, a stock can be bullish on DI with an ADX of 12, which simply means "drifting up, but not really trending".
Note that ADX itself is always positive and never tells you direction. A rising ADX in a downtrend means the downtrend is getting stronger. Always read ADX together with the DI lines.
Common use cases
- Sideways stock for a premium-selling trade: (1) Length 14 (default), (2) To (ADX): 20, (3) Direction: Any. (Or just pick the "Sideways" preset.)
- Strong uptrend to trade with: (1) Length 14, (2) From (ADX): 25, (3) Direction: Bullish (DI+ > DI-)
- Strong downtrend to trade with: (1) Length 14, (2) From (ADX): 25, (3) Direction: Bearish (DI- > DI+)
- A trend that is just getting going: (1) Length 14, (2) From (ADX): 20, To (ADX): 30, (3) Direction: Bullish, catches trends earlier, before the move is well advanced.
- A possibly exhausted trend: (1) Length 14, (2) From (ADX): 50, very strong readings often precede a pause or a reversal, which can suit contrarian or short-premium trades.
- Direction only, any strength: (1) Length 14, (2) From/To left blank, (3) Direction: Bearish, every stock where sellers currently have the upper hand, trending or not.
- Filter the chop out of an existing scan: add From (ADX): 25 on top of a directional scan so you only get names that are actually moving.
Read more
About Technical analysis Engine - KB
About RSI - KB
About Bollinger Bands - KB
About MA indicator - KB
About MA Crossover indicator - KB
About MACD indicator - KB
About Stochastic Oscillator - KB
Our ADX Backtest on Iron Condors - Blog
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