How to Use the ADX Indicator Like a Pro: Step-by-Step Guide

The Average Directional Index (ADX) is one of the most reliable tools for identifying the strength of a market trend.

Introduced by J. Welles Wilder in 1978, the ADX has stood the test of time and remains a go-to indicator for traders worldwide.

Whether you’re optimizing your entry points, improving your exits, or filtering out market noise, the ADX indicator offers an invaluable edge in trading.

This guide simplifies the ADX indicator and provides actionable steps to integrate it into your trading strategies, whether you are a beginner or an experienced trader.

Basics of the ADX Indicator

The Origin of the ADX Indicator

First introduced in Wilder’s book "New Concepts in Technical Trading Systems," the ADX was originally part of a larger directional movement system.

Its primary purpose is to measure trend strength without focusing on the direction, making it highly versatile across markets.

Key Components of the ADX Indicator Explained

The ADX indicator consists of three components:

• ADX Line: Shows trend strength; values above 20 suggest a strong trend.

• +DI (Positive Directional Indicator): Measures the strength of upward price movements.

• -DI (Negative Directional Indicator): Measures the strength of downward price movements.

When used together, these components offer a complete picture of market dynamics, helping traders spot opportunities and avoid market noise.

Adx indicator on chart. The top section shows the +/-DI as lines and histogram. The bottom section shows the ADX as colored line and as area.

How the ADX Indicator Works

Understanding ADX Values

• Above 20-25: Strong trend (upward or downward).

• Below 20: Weak or range-bound market.

• Above 50: Exceptionally strong trend.

What the +DI and -DI Values Tell Us

• +DI > -DI: Indicates upward momentum; a potential buy signal.

• -DI > +DI: Indicates downward momentum; a potential sell signal.

A chart showing the ADX relation to price

The ADX alone doesn’t tell you the direction of the trend but complements other indicators to ensure accuracy in your trading decisions.

The indicator is available in all trading/charting platforms. You can find its exact calculation here: https://www.investopedia.com/terms/a/adx.asp

" The ADX indicator is not a directional indicator; it only shows the strength of the trend."

Ali Casey

Practical Applications of the ADX

Using ADX for Entry and Exit Points

The ADX is perfect for identifying high-confidence entry and exit points:

• Buy Opportunity: When +DI crosses above -DI and ADX is rising.

• Sell Opportunity: When -DI crosses above +DI and ADX is rising.

Using ADX as a Trend Filter for Other Signals in Trading Strategies

To avoid false signals in low-trend conditions, use ADX as a filter:

• Take positions only when ADX is above 20.

• Avoid trades when ADX is below 20, as markets are likely range-bound.

This approach ensures that you focus on markets with clear trends, minimizing false signals.

ADX in Combination with Other Indicators

Using the Classic RSI2 Mean Reversion Strategy on the S&P 500 Index

The RSI2 strategy identifies overbought and oversold market conditions. For example:

• Buy when RSI(2) < 25.

• Sell when RSI(2) > 75.

• Market: @ES.D SP500 emini futures daily session

• Data: 2007-2024

Combining this with the ADX indicator ensures that the RSI signals are filtered to favor trending markets.

Combine ADX with RSI2 Strategy as a Filter

By using ADX as a filter:

• Filter Buy Signals: Enter only when ADX is above 20 to ensure a trending market.

• Filter Sell Signals: Skip trades when ADX is below 20 to avoid market noise.

RSI2 strategy metrics compared with different ADX filters.

The metrics show how a trend filter can add a lot of value to already one of the best strategies of the past 7 years.

Advanced Tools for Backtesting ADX Strategies

What is StrategyQuant X (SQX)?

StrategyQuant X (SQX) is a powerful algorithmic trading tool designed for creating, backtesting, and optimizing trading strategies without coding. It’s perfect for traders of all skill levels, offering an intuitive interface with advanced functionality.

You can try a full-featured trial for 14 days and explore its capabilities. If you decide to purchase, use my exclusive coupon "StatOasis" to get 23% off.

How to Use SQX with ADX

In SQX, you can combine ADX with RSI or other strategies:

1. Build a basic RSI2 strategy using AlgoWizard.

2. Switch to template mode and add ADX filters.

3. Test ADX filters against historical data to optimize performance.

Example of multiple strategies built using RSI2+ADX template in StrategyQuant X

Common Mistakes to Avoid with ADX

1. Relying Solely on ADX: Combine it with other indicators to confirm signals.

2. Ignoring Low ADX Values: Low ADX doesn’t always mean no opportunities; it signals range-bound markets which could be ideal for certain strategies.

3. Misinterpreting Crossovers: Ensure ADX is rising to confirm trend strength when acting on +DI/-DI crossovers.

A Portfolio of strategies using ADX filters

Blending ADX-enhanced strategies with less correlated ones diversifies risk while maximizing returns. I used 20 strategies from the build above to be used as the base to create a portfolio of uncorrelated strategies.

Example of combining 3 strategies, all using the same basic RSI2 entry/exit rules, plus a different ADX filter.

" You can use the ADX as a signal generator on its own or as a filter to enhance other trading strategies"

Ali Casey

The same portfolio showing the full metrics and strategy correlations.

Conclusion

Why the ADX Indicator Deserves a Place in Your Trading Toolkit

The ADX indicator is a robust tool that empowers traders to filter out market noise, identify strong trends, and optimize trading strategies.

By combining ADX with complementary entry signals like RSI and customizing its settings, you can enhance your trading results.

With a focus on real-world application and proper integration into your trading system, the ADX indicator is an essential ally for traders at all levels.

Questions & Answers:

1. How can I use the ADX indicator to improve my trading strategy?

The ADX helps traders focus on strong trends and avoid weak or range-bound markets. Here’s how you can use it:

• Identify Trend Strength: Only trade when ADX is above 20-25, as this signals a trending market.

• Filter Trades: Ignore buy/sell signals in weak markets where ADX is below 20.

• Confirm Entries and Exits: Combine ADX with other indicators like RSI, Moving Averages, or price action for stronger confirmation.

For example, adding ADX to an RSI2 strategy improves performance by ensuring trades occur only in trending markets.

2. What are the best settings for the ADX indicator?

The default setting for ADX is 14-period, but it can be adjusted based on your trading style:

• Short-Term Traders (Scalping/Intraday) → Use a 7-10 period for faster signals.

• Swing/Long-Term Traders → Use 20-30 periods to capture more stable trends.

Additionally, the ADX threshold can be adjusted. A 20-25 level works well, but some traders set it to 30 for stronger trends.

3. Are there any limitations to using the ADX indicator?

Yes, while the ADX is powerful, it has some drawbacks:

• Lagging Indicator: Since ADX is based on past price data, signals may come in late.

• False Signals in Choppy Markets: ADX can remain low even when price makes big moves, leading to missed opportunities.

• No Directional Clarity: ADX only measures trend strength but doesn’t indicate trend direction—that’s why combining it with +DI/-DI or other indicators is crucial.

To mitigate these issues, always backtest ADX with additional filters before live trading.

4. What is the best ADX threshold for filtering trades?

The best ADX threshold depends on your trading timeframe:

• Shorter timeframes (5-min, 1-hour charts) → Use 20 as the threshold.

• Longer timeframes (Daily, Weekly) → Use 25-30 to ensure only strong trends are included.

You mentioned in your video that ADX > 20-25 is a strong signal that a trend is present, while ADX < 20 suggests sideways market conditions.

5. Can the ADX be used as a standalone trading strategy?

No, ADX is best used as a filter rather than a signal generator. In your video, you showed how:

• ADX only measures trend strength and doesn’t give buy/sell signals.

• Combining ADX with RSI or Moving Averages improves strategy performance.

• Using +DI and -DI crossovers alongside ADX can help confirm entry points.

For example, your RSI2 strategy works better when ADX filters out weak trends.

6. How does ADX improve backtesting results in SQX?

Your StrategyQuant X (SQX) backtests showed that adding ADX as a filter:

• Increases profitability by avoiding trades in weak trends.

• Reduces drawdowns by preventing entries in choppy markets.

• Enhances return-to-drawdown ratio, making strategies more robust.

By applying ADX > 20 as a filter, your RSI2 strategy had better win rates, reduced exposure, and stronger overall performance.