ADX stands for Average Directional Index, which is a technical analysis indicator used to measure the strength of a trend in the price of an asset. The ADX indicator was developed by J. Welles Wilder Jr. and was introduced in his 1978 book, "New Concepts in Technical Trading Systems."
The ADX indicator is calculated by taking the difference between the directional movement indicators (+DI and -DI) and smoothing the result over a specified period of time. The ADX value ranges from 0 to 100, with higher values indicating a stronger trend.
When the ADX value is below 20, it is considered a weak trend, and the price of the asset may be moving sideways or in a range. When the ADX value is between 20 and 40, it is considered a moderate trend, and the price of the asset may be starting to trend in a particular direction. When the ADX value is above 40, it is considered a strong trend, and the price of the asset is likely to be trending strongly in a particular direction.
The ADX indicator can be used to identify the strength of a trend and to determine whether a trend is worth trading. Traders may use the ADX indicator to identify the strongest trends in the market and to filter out weaker trends that may be subject to price fluctuations.
The ADX indicator can also be used in conjunction with other technical analysis tools, such as moving averages or Bollinger Bands, to identify potential trading opportunities. For example, a trader may look for a crossover between the price of an asset and a moving average, and then confirm the strength of the trend using the ADX indicator.
Overall, the ADX indicator is a useful tool for identifying the strength of a trend in the price of an asset and for filtering out weaker trends that may be subject to price fluctuations. Traders may use the ADX indicator in combination with other technical analysis tools to identify potential trading opportunities and to confirm the strength of a trend before making a trading decision.