The average directional index, also called ADX, is used to determine if a market is trending or trading. When the ADX line is rising, the market is trending. When the ADX line is falling, the market is trading. ADX is usually plotted along with two lines known as the DMIs (Directional Movement Indicators).
When a market is trending (ADX line is rising), trend based indicators like moving averages work well. When a market is trading (ADX line is falling), trading indicators like oscillators (Stochastics, MACD) work well.
When a market is trending, buy and hold works great with profit targets of 10% and more. When a market is trading, short term trading works better with smaller profit targets of 2.5% to 5%.
The average directional movement index (A.D.X.) was developed in 1978 by J. Welles Wilder as an indicator of trend strength in a series of prices of a financial instrument. A.D.X. has become a widely used indicator for technical analysts, and is provided as a standard in collections of indicators offered by various trading platforms.