I've compiled some information on the Wilder Directional Movement Index - which seems to contradict for my mind what Chalea states (although happy to be proved wrong as still trying to get my head around TA concepts lol):
The Average Directional Index (ADX) measures the strength of a prevailing trend as well as whether movement exists in the market. The ADX is measured on a scale of 0 to 100. A low ADX value (generally less than 20) can indicate a non-trending market with low volumes whereas a cross above 20 may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend.
This indicator can also be used to identify non-trending markets, or a deterioration of an ongoing trend. Although market direction is important in its calculation, the ADX is not a directional indicator.
An ADX above 30 on the scale indicates there is a strong trend in that particular time frame. Recall the principle that momentum precedes price....Therefore, when using ADX in your studies, note that when ADX forms a top and begins to turn down, you should look for a retracement that causes the price to move toward its 20-day exponential moving average (EMA). In an uptrending market, the technician will buy when the price falls to or near the 20-unit EMA, and in a downtrending market, one should look to sell when the price rises to or near its 20 unit EMA.
In Wilder's book, he notes that this system works best on securities that have a high Commodity Selection Index (CSI) value. He says, "as a rule of thumb, the system will be profitable on commodities that have an ADXR value above 25. When the ADXR drops below 20, then do not use a trend-following system."
The CSI is designed for short-term traders who can handle the risks associated with highly volatile markets.
