The ADX (Average Directional Index) indicator measures trend strength, but unlike most indicators, it doesn't show direction. This makes ADX a convenient addition to both trend and range strategies, since it helps determine in advance which of the two approaches fits the current market.
How ADX works
ADX is calculated from two direction lines — +DI and -DI — which show the strength of upward and downward movement respectively. The ADX indicator itself is a smoothed value of the difference between these lines and is plotted on a separate scale, usually from 0 to 100, though in practice readings above 60 are rare.
ADX threshold values
The accepted interpretation of ADX readings looks like this:
- Below 20 — a weak trend or none at all, the market is likely ranging.
- 20 to 25 — a transition zone, the trend may be forming or fading.
- 25 to 50 — a pronounced trend, suited to trend strategies.
- Above 50 — a very strong trend, which can also signal the move is nearing exhaustion.
The +DI and -DI direction lines
Besides the ADX value itself, the +DI and -DI lines matter, showing the direction of movement strength. +DI crossing above -DI signals buyer dominance; the reverse crossover signals seller dominance. Combining ADX with these lines lets you determine not just strength but direction.
How to use ADX in binary options
Before choosing a strategy, it's useful to check the current ADX reading: at low readings, switch to oscillators and range approaches, described in the article on the range strategy, and at readings above 25, use trend strategies, such as the one described in the article on the trend-following strategy.
Limitations of ADX
ADX is a lagging indicator, since it's built on moving averages of the direction lines. That means a high ADX reading can appear after a significant part of the move has already happened, not at its start. ADX also doesn't show when a trend will end — additional signals, like divergence, are needed for that.
Combining ADX with other indicators
ADX is rarely used in isolation — more often it serves as a market-regime filter before applying other indicators, such as moving averages, described in the article on MA and EMA in trading. This combination reduces false signals from trend indicators in a ranging market.
Automating ADX calculation
Calculating the ADX value and direction lines, and automatically switching between trend and range rule sets, can be fully automated. A trading robot for Pocket Option can adapt its signal logic based on the current ADX reading — details on the features page.
Conclusion
The ADX indicator helps determine which strategy type suits the current market — trend or range — by measuring movement strength without regard to direction. Use ADX as a filter before choosing other indicators and account for signal lag. Automatic regime detection is available in the robot's plans.