The Average Directional Index quantifies trend strength on a scale from 0 to 100, regardless of direction. Developed by J. Welles Wilder, ADX is derived from two directional movement indicators (+DI and -DI) that measure bullish and bearish pressure respectively. A rising ADX above 25 signals a strengthening trend, while ADX below 20 indicates a ranging or trendless market — making it an invaluable filter for choosing between trend and range strategies.
ADX measures trend strength, not direction. +DI measures bullish directional movement; -DI measures bearish directional movement. ADX above 25: trending market. ADX below 20: ranging/trendless market. Rising ADX: trend is strengthening. Falling ADX: trend is weakening (not necessarily reversing).
Enter trend-following trades when ADX is above 25 and rising, confirming a strong trend environment. Go long when +DI crosses above -DI with ADX above 20 and rising. Go short when -DI crosses above +DI with ADX above 20 and rising. Use ADX below 20 as a filter to switch to range-trading strategies instead of trend-following.
Exit trend trades when ADX peaks and begins declining from elevated levels, suggesting the trend is losing steam. Take profits on DI crossovers against your position while ADX is still elevated. Close positions when ADX drops below 20, indicating the trend environment has ended. Trail stops while ADX remains above 25 and rising.
1H, 4H, Daily
ADX is most powerful as a regime filter — use it to determine whether you should apply trend-following or range-trading strategies, rather than as a standalone entry signal. A common mistake is interpreting falling ADX as a trend reversal; it simply means the trend is weakening, which could lead to a range, not necessarily a move in the opposite direction. DI crossovers above ADX 20 produce far better results than crossovers in low-ADX environments.
The Commodity Channel Index measures an asset's deviation from its statistical mean price, oscillating around a zero line with no fixed upper or lower bound. Originally designed for commodities by Donald Lambert, CCI is effective across all markets. Readings above +100 indicate strong bullish momentum (potential overbought), while readings below -100 signal strong bearish momentum (potential oversold).
Rate of Change is a pure momentum oscillator that measures the percentage change in price over a specified number of periods. It oscillates around a zero line, with positive values indicating upward momentum and negative values indicating downward momentum. ROC is useful for identifying momentum shifts, overbought/oversold conditions, and divergences that precede price reversals.
The Parabolic Stop and Reverse (SAR) is a trend-following indicator that plots dots above or below price to define the current trend direction and provide trailing stop levels. Developed by J. Welles Wilder, the indicator accelerates toward price as the trend matures, eventually crossing price to signal a reversal. The parabolic curve of the dots gives the indicator its name.
The Vortex Indicator consists of two oscillating lines — VI+ (positive trend movement) and VI- (negative trend movement) — that capture the directional movement of price through the relationship between the current high and prior low, and the current low and prior high. Crossovers between these lines signal trend changes and provide entry and exit timing for trend-following strategies across any market.