💪 Measuring trend strength: ADX, Aroon, choppiness and Ichimoku

🎯 In 30 seconds: Most indicators work in either a trend or a range, not both, so it helps to measure which one you are in. ADX measures how one-sided the recent bars have been, without saying which way. Aroon counts how long ago the last high and low were. The choppiness index compares the total distance traveled with the net range covered. Ichimoku bundles several midpoint lines and a shifted cloud into one picture of trend and support. All four lag, and their thresholds are conventions.

Why measure trend strength at all

A moving-average crossover makes money in long trends and bleeds in sideways markets. An oscillator does the opposite. A trend-strength reading is a way to choose which toolkit to trust, and to notice when the market switches from one regime to the other. The market structure chapter does the same job by reading swings by eye. These tools put a number on it.

ADX and the directional lines

J. Welles Wilder Jr. introduced the Directional Movement system in 1978. It has three lines, usually calculated over 14 bars.

1. Directional movement for one bar. Up move = today’s high minus yesterday’s high. Down move = yesterday’s low minus today’s low. If the up move is larger and positive, it counts as +DM and -DM is zero. If the down move is larger and positive, it counts as -DM. Inside bars give zero for both.
2. Smooth and scale. Smooth +DM, -DM and true range over 14 bars with Wilder’s method. Then +DI = 100 × smoothed +DM / smoothed true range, and the same for -DI.
3. DX. DX = 100 × the gap between +DI and -DI / their sum.
4. ADX. A 14-bar Wilder average of DX.

Worked example. A hypothetical stock’s high moves from $51.00 to $52.00 and its low from $49.80 to $49.50. Up move = 1.00 and down move = 0.30, so +DM = 1.00 and -DM = 0 for this bar. Suppose after smoothing the 14-bar totals are +DM 7, -DM 3 and true range 20. Then +DI = 35, -DI = 15 and DX = 100 × 20 / 50 = 40. If those numbers held for a few weeks, ADX would settle near 40, a strong trend by the usual standard.

How people read it:

• ADX below about 20: no clear trend. Range tools tend to fit better.
• ADX above about 25 and rising: a trend is under way. Pullback entries in the trend direction are the usual approach.
• Direction comes from the DI lines. +DI above -DI points up, the reverse points down. ADX itself rises in strong downtrends too.
• ADX turning down from a high level often means the trend is pausing or losing pace. Price can keep rising while ADX falls.

ADX is smoothed twice: once inside the DI lines and again on DX. That double smoothing is why it reacts late. A trend can be weeks old before ADX crosses 25, and it can stay high after the trend has already stalled.

Aroon: how long since the last high and low

Tushar Chande published Aroon in 1995. It looks at timing rather than price distance. With the default 25 bars:

• Aroon Up = 100 × (25 minus bars since the 25-bar high) / 25
• Aroon Down = 100 × (25 minus bars since the 25-bar low) / 25
• Aroon oscillator = Aroon Up minus Aroon Down

Example: the 25-bar high was set 5 bars ago and the 25-bar low 20 bars ago. Aroon Up = 100 × 20 / 25 = 80. Aroon Down = 100 × 5 / 25 = 20. The oscillator reads 60. Fresh highs and stale lows describe an uptrend.

Readers watch for Aroon Up holding above 70 while Aroon Down stays below 30, and they treat both lines sinking below 50 as a sign of a range. Aroon steps in jumps, because a new high resets the count to 100 at once. Some software counts a window of 26 bars, so values can differ slightly between platforms.

The choppiness index

The choppiness index compares how far price wandered with how much ground it covered. Over n bars (14 by default): add up each bar’s true range, divide by the highest high minus the lowest low, take the base-10 logarithm, divide by the logarithm of n, and multiply by 100.

Three hypothetical cases over 14 bars, each with true ranges adding up to $28:

The scale runs from near 0 to 100. Readings above about 61.8 are called choppy and below about 38.2 trending. Those thresholds were borrowed from Fibonacci ratios by convention. Choppiness says nothing about direction.

Ichimoku: five lines and a cloud

Ichimoku Kinko Hyo was developed in Japan by Goichi Hosoda and published in the late 1960s. Most of its lines are midpoints: the average of the highest high and lowest low over a window. The defaults are 9, 26 and 52.

• Tenkan-sen (conversion line): 9-bar midpoint.
• Kijun-sen (base line): 26-bar midpoint.
• Senkou Span A: average of the two lines above, plotted 26 bars ahead.
• Senkou Span B: 52-bar midpoint, plotted 26 bars ahead.
• Chikou Span (lagging line): today’s close, plotted 26 bars back.

The area between the two spans is shaded as the cloud. Example: if the 9-bar high and low are $30 and $26, Tenkan is $28. If the 26-bar high and low are $31 and $23, Kijun is $27. Span A is $27.50. If the 52-bar high and low are $34 and $20, Span B is $27. All three sit close together, which suggests a thin cloud and a market without a strong lean.

Common readings: price above the cloud is bullish, below is bearish, inside is undecided. A thick cloud is treated as stronger support or resistance than a thin one. Tenkan crossing above Kijun is a bullish signal, and it counts for more when it happens above the cloud.

Sources

• J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978), Directional Movement and ADX
• Perry J. Kaufman, Trading Systems and Methods, trend strength measures
• John J. Murphy, Technical Analysis of the Financial Markets (1999), trending versus trading markets
• Moneydesks Technical Analysis tool: Indicator guide entries for ADX, Aroon, Aroon oscillator, choppiness and Ichimoku