What is the primary purpose of the Average Directional Index (ADX)?

The Average Directional Index (ADX) is primarily utilized to measure the strength of a trend, regardless of its direction—whether it is upward or downward. The ADX is calculated based on the movements of the price and is derived from the positive and negative directional indicators (DI+ and DI-). It provides traders with a quantifiable way to determine how strong a trend is, which can inform their trading strategies.

When the ADX value is above a certain threshold, it indicates that a strong trend is in place, suggesting that traders may want to follow the trend. Conversely, lower ADX readings signify a weak trend or a ranging market, which can influence the trader to adopt a different approach, such as looking for opportunities in consolidation or range-bound trading.

Using the ADX effectively allows market technicians to better understand current market conditions. Instead of merely predicting future price movements or assessing volatility, the focus remains on the strength behind existing trends, making it a vital tool in trend analysis.