The ADX tells when the market is trending or not trending without regard to market direction.  In a nutshell, it attempts to measure in an up trend how much higher the higher highs are.  And in a downtrend to what degree the lower lows are being made.  It is a very complex technical tool.  In fact it is too complex to truly explain here. However, a picture is worth a thousand words.

The ADX indicator is actually a suite of indicators meant to measure whether or not the asset under study is in a trending mode. It is a fairly slow indicator and one must be careful in applying it because it takes time to adjust to market moves. Whipsaws are possible, and in fact likely if the market is in a wide trading range.

THE COMPONENTS OF THE INDEX ARE:

DIRECTIONAL MOVEMENT (+DM and -DM) -- This indicator represents the largest part of today's move that is outside the previous day's range. So, for example, if yesterday's price range was 18-22 and today's is 17-24, then +DM is two and -DM for the day is zero. On an inside day, there is no directional movement. This system does not care where the close is, so in the example above, even if the close was on the low, the directional movement is considered to be positive because the largest part of today's range is above the previous session's range. Note that -DM is always positive, so if today's range is 17-20 and yesterday's was 19-19 1/2, then -DM is two and +DM is zero.

DIRECTIONAL MOVEMENT INDICES (+DI and -DI)
This indicator is computed by using the daily +DM and -DM discussed above and taking a ratio with the daily true range. The daily true range is the largest of the following: The absolute value of:

A. The distance from today's high to today's low.
B. The distance from today's high to yesterday's close.
C. The distance from today's low to yesterday's close.

What the true range does is adjust for gaps by, in essence, adding them back into today's trading range. We then compute today's +DI and -DI as the ratio of the DM's to the daily true range (TR), so:

+DI =+DM/TR and -DI = -DM/TR

This indicator tells you how powerful today's move was in comparison to the day's range. On a day in which prices gap higher and close at the high, that day's +DI would be 1.00. Remember, on an inside day, both DI's will be zero, and if there is positive directional movement, then there can be no negative directional movement.

DIRECTIONAL INDICATOR (DX)
This is the ratio of the difference between the smoothed +DI and -DI and the total directional movement.

That is: DX = [+DI(14) - -DI(14)] / [+DI(14) + -DI(14)]

AVERAGE DIRECTIONAL INDEX (ADX)
This is just the smoothed DX (again, typically a 14-day exponential smoothing factor).

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