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This indicator was developed by J. Welles Wilder, in 1978. It compares the highs and lows of consecutive periods, terms them +DM, and -DM, and on the absolute difference between these values, it reaches at the value of the indicator.
The indicator is used to evaluate the strength of a trend. ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although other time periods can be used.
ADX is plotted as a single line with values ranging from a low of zero to a high of 100. The indicator is usually plotted in the same window as the two directional movement indicator (DMI) lines, from which ADX is derived.
The ultimate value of the ADX is between 0 and 100, and a value below 20 is a sign weakness, while a value above 40 shows that the trend remains strong.
When the +DMI is above the -DMI, prices are moving up, and ADX measures the strength of the uptrend. When the -DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend. Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number(see also Parabolic SaR). When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend.