Lesson 5 of 6 · 8 min

ATR and ADX: volatility and trend strength

ATR and ADX, like the RSI, were published by Wilder in 1978. They answer two questions that are often confused: how much does the price move and does it move in one direction. A market can be very volatile and have no direction at all.

ATR: average true range

The true range is the largest of three values: high minus low, high minus the previous close, and the previous close minus low, all as absolute values. This way the gap between candles is counted too. ATR is Wilder's average of true ranges, usually over 14 candles.

ATR is in price units. To compare coins, divide it by the price. This directly decides whether a stop is too tight.

ATR does not show direction. It rises in both a strong rally and a panic, because it only looks at the width of the movement. A common rule is to place the stop 1.5 to 3 ATR from the entry, but that range is not a law; it is a starting point to be tested on your own system.

ADX: strength without direction

Calculating ADX takes three steps. First, for each candle the move of the high is compared with the move of the low: if the high rose by 120 and the low fell by 40, the positive move is 120 and the negative one is 0. An inside candle, with no new high and no new low, gives zero for both. Second, the smoothed moves are divided by the smoothed true range, producing +DI and −DI. Third, DX is 100 × the absolute difference of +DI and −DI divided by their sum, and ADX is the smoothed DX.

• An ADX above roughly 20 to 25 is commonly taken as a sign that a trend exists. The threshold is a convention, not a boundary in nature.
• A rising ADX means directionality is strengthening, which in a decline means the decline is strengthening.
• A falling ADX from 40 to 30 does not mean a sideways market, only that the trend is weakening. A trend may still exist.
• ADX is smoothed, so it lags. It needs about 28 candles for its first value, and it reacts to reversals with a delay.

In the Analyses, ATR(14) and ADX(14) are calculated from closed hourly candles using Wilder smoothing. ATR is displayed in the coin's price, so divide it by the current price for comparison. Together, ATR and ADX give you a basic description: how lively the market is and whether it has a direction.