Three lines, each saying one thing
The usual setting is 14 sessions. Each day you work out two figures: the up-move (the high minus the previous high) and the down-move (the previous low minus the low). If the up-move is larger than the down-move and above zero, it counts as an upward move (+DM) and the downward move (−DM) is zero. If the down-move is the larger one and above zero, it is the reverse. Otherwise both are zero. Then +DM and −DM are Wilder-smoothed and divided by the True Range smoothed the same way, and the result × 100 gives +DI and −DI. A figure called DX is then calculated from them, and ADX is a smoothed average of DX. You do not need to compute this by hand; what matters is the idea.
A worked example
The common levels
Many analysts treat an ADX below 20 as describing a market without a clear trend, and above 25 as describing a trend in place. These numbers are a widely used convention, not scientific limits, and every stock has its own character. And because ADX is smoothed twice, it is slow; it lags both the start and the end of a trend.
High ADX while price falls?
Yes, and it is perfectly normal. ADX cannot tell up from down. If price is falling hard and −DI clearly dominates, ADX rises. That is why you look at +DI and −DI for the direction, and at ADX for its strength.
One more point: ADX falls when a trend weakens, even if price is still moving the same way. A falling ADX means the dominant side is no longer dominating as clearly.
See what the engine uses
ADX is one of the inputs the FoudaLens engine reads to describe a stock's state. Read the methodology page for the full picture.
Check yourself
1. +DI = 25 and −DI = 25. What is DX?
2. Price is falling hard and ADX is rising. What does that describe?
Summary
- ADX measures trend strength from 0 to 100 and says nothing about up or down.
- +DI and −DI show the direction; ADX measures how clearly one of them dominates.
- The 20 and 25 levels are conventions, and ADX is slow, lagging a trend's start and end.