The Average Directional Index, or ADI, is a premier technical analysis indicator that shows investors when markets are trending. We can use the ADI to find key points of entry, and explore when a buy or sell ahead of a trend makes sense.
The Average Directional Index does not tell us when the market is in bull or bear territory; instead, the ADI just tells us that the markets are moving!
When the ADI is higher, the market is trending stronger, when the ADI reading is lower, the markets aren’t trending in a direction at all. We can gather this from the name Average DIRECTIONAL Index and also from a chart:
The key reading on the ADI is 25. Above 25, a clear trend is emerging, and the market is soon to rally in its current direction. Below 25, however, the market is less likely to pick a single direction, and may just bounce around in between a very thin channel.
The 25 reading is the mid-point for forex traders who use the MetaTrader 4 platform. Other forex traders who use other platforms will want to confirm that the midpoint is 25. On many platforms, the mid-point rests at a reading of 50.
Trading on the ADI
Ideally, traders will use the ADI to confirm trend breakouts through support and resistance. When the ADI rises quickly, the trend is confirmed and a movement through 25 on the ADI is indicative of such.
The ADI can be used in tandem with other indicators like the RSI, MACD, or Bollinger Bands to give a second opinion on an emerging trend.
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