ADX was developed by J. Welles Wilder as an indicator of the strength of the trend. It is plotted along with two other indicators Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI) which define the trend direction. The calculation of the components of the ADX is as follows:

1st step

• Up Move = last high − previous high
• Down Move = last low − previous low
• if Up Move > Down Move and Up Move > 0, then +DM = Up Move, else +DM = 0
• if Down Move > Up Move and Down Move > 0, then −DM = Down Move, else −DM = 0

2nd step

• +DI = 100 times EMA of +DM divided by ATR
• −DI = 100 times EMA of −DM divided by ATR

3rd step

• ADX = 100 times EMA of the absolute value of (+DI − −DI) divided by (+DI + −DI)

ADX is used to measure the strength or weakness of a trend, but not the actual direction. According to Wilder, a strong trend is present when ADX is above 25 and no trend is present when below 20. The direction of the trend is defined by +DI and -DI. The bulls control the market when +DI is greater than - DI, while the bears have the edge when - DI is greater. Crosses of these directional indicators can be combined with ADX for generating of buy and sell signals.