ADX
Also written Average Directional Index
An oscillator running from zero to 100 that measures how strong a trend is, without indicating whether that trend is up or down.
In plain language
A trend can be strong or weak, and separately, it can be up or down. Most indicators tell you the direction. ADX tells you the strength instead.
A low ADX means the market is not trending much either way — trend-following strategies are less likely to work. A rising ADX means a trend, whichever direction it is running, is gaining real force.
How it works
The workbook: "ADX measures strength of the trend and is widely used as a trend indicator... It quantifies the strength of the trend, and its calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars... ADX does not identify the direction of the market; it registers trend strength irrespective of whether the price is trending up or down."
It is normally plotted alongside two Directional Movement Indicators, +DMI and −DMI. The workbook gives a clear threshold: an ADX below 25 signals a weak trend or no trend; a rising ADX that has crossed 25 signals a strengthening trend. A buy signal needs both conditions together — +DMI crossing above −DMI, while ADX is also rising — and the workbook explicitly warns against acting on a DMI crossover when ADX is weak.
A worked example
Illustrative. A stock's ADX has been sitting at 18 for weeks — a weak or non-existent trend, below the 25 threshold. Over the next two weeks, ADX climbs to 27, and at the same time the +DMI line crosses above the −DMI line, at values of 22 and 19 respectively.
Both conditions the workbook requires are now met: ADX has crossed above 25 and is rising, and +DMI has crossed above −DMI. A trend-following trader takes this as a buy signal. Had the DMI crossover happened while ADX was still at 18, the workbook's own rule says to avoid acting on it — the trend is not strong enough to trust the signal.
Why NISM asks about it
Chapter 15.9.4 (Average Directional Index) sets out the 14-bar default, the 0–100 scale, the 25 threshold, and the DMI crossover signal logic. Expect a question testing the default period, the 25 threshold, or the distinction between ADX (strength) and DMI (direction).
Common exam traps
- A high ADX does not mean bullish — it only means the trend, whatever its direction, is strong. A high ADX in a falling market signals a strong downtrend, not a buying opportunity.
- The workbook explicitly says to avoid DMI crossovers when ADX is weak — a crossover alone, without a rising ADX above 25, is not a reliable signal on its own.
Check yourself
1.A trader sees +DMI cross above −DMI while the ADX is reading 19 and drifting sideways. What does the chapter advise?
- a)Buy, because the DMI crossover is the signal and ADX only confirms afterwards
- b)Avoid the trade, because an ADX below 25 indicates a weak trend or no trend and the trade is highly unlikely to succeed
- c)Sell, because an ADX below 25 is itself a bearish signal
- d)Buy a smaller quantity, because ADX below 25 halves the reliability of the signal
Show the answer
Answer: (b) Avoid the trade, because an ADX below 25 indicates a weak trend or no trend and the trade is highly unlikely to succeed
The workbook is unambiguous: an ADX value of less than 25 is generally considered a weak trend or no trend, and avoid the DMI crossovers and crossdowns if the ADX value is weak — it is highly unlikely that the trade will succeed.
Option A reverses the sequence. The valid buy setup requires both conditions together: +DMI crossing over −DMI from the lower side AND a rising ADX, particularly one that has crossed 25.
Option C misunderstands what ADX is. ADX does not identify the direction of the market — a low reading means the market is going nowhere, not down. Option D invents a position-sizing rule the chapter does not contain.
Where this is taught
Free preparation for NISM Series XVRelated terms
- MACDMoving Average Convergence Divergence — the gap between the 12- and 26-period EMAs, read against its own 9-period EMA, to track shifts in momentum rather than price.
- Moving averageThe average price of a share over a rolling window, recalculated each session — it smooths away daily noise so that the underlying trend, and changes in it, become visible.
- RSIA momentum oscillator scaled 0 to 100 that measures the speed and size of recent price changes — conventionally read as overbought above 70 and oversold below 30.
- Support and resistancePrice levels where a move tends to pause or reverse — support where demand concentrates and forms a floor, resistance where supply concentrates and forms a ceiling.