Average Directional Index (ADX)
The world of trading and investments is filled with various tools and indicators that help traders make informed decisions. Among these tools, the Average Directional Index (ADX) stands out as one of the most valuable indicators for determining the strength of a market trend. Understanding how to use this tool effectively can significantly improve trading performance. This article will guide you through all the essential details about ADX in a simple and beginner-friendly manner.
Table of Contents
What is the Average Directional Index?
The Average Directional Index (ADX) is a technical analysis tool created by J. Welles Wilder in 1978. It is designed to measure the strength of a market trend, regardless of its direction. Whether the market is moving upward or downward, the ADX helps traders understand if the trend is strong or weak.
The ADX is part of the broader Directional Movement System, which includes two additional components: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). Together, these three lines provide insights into market trends.
The ADX ranges from 0 to 100. A higher ADX value indicates a stronger trend, while a lower value suggests a weaker or non-existent trend. Here’s a basic interpretation of ADX values:
- ADX below 20: Weak or no trend (sideways market).
- ADX 20–25: Emerging trend.
- ADX 25–40: Strong trend.
- ADX above 40: Very strong trend.
The ADX does not indicate the direction of the trend; instead, it focuses purely on its strength.
Understanding the Average Directional Index
The ADX is especially useful for traders who want to avoid trading in sideways markets and focus on strong trends. A sideways market, often called a ranging market, lacks clear direction and can be challenging to trade profitably.
By using the ADX, traders can identify whether they should adopt trend-following strategies or wait for a better opportunity. For example, if the ADX is below 20, a trader might decide to stay out of the market. Conversely, if the ADX rises above 25, it could signal the start of a significant trend.
How Does ADX Differ from Other Indicators?
Unlike indicators focusing on price levels or moving averages, the ADX is a non-directional indicator. This means it only measures the trend’s strength, not whether the price is going up or down. To determine the direction of the trend, traders need to look at the accompanying +DI and -DI lines.
Components of the Average Directional Index (ADX)
The Average Directional Index (ADX) is a three-part system that provides comprehensive insights into market trends. These three components work together to measure a trend’s direction and strength. Let’s break down each component and how they interact:
- Positive Directional Indicator (+DI)
The +DI line measures the market’s upward momentum. It quantifies the extent to which prices have moved higher over a specific period. When the +DI line rises, it signals that the market’s bullish strength is increasing. This component is critical for identifying uptrends and helps traders determine whether buyers dominate the market.
- Negative Directional Indicator (-DI)
The -DI line measures the market’s downward momentum. It calculates how much the prices have moved lower over the same period. When the -DI line rises, bearish pressure grows, showing that sellers are in control. This component is crucial for identifying downtrends and gauging bearish momentum in the market.
- ADX Line
The ADX line is the central feature of this system. Unlike the +DI and -DI lines, which show directional momentum, the ADX measures the overall strength of the trend regardless of its direction. The ADX line rises when the trend becomes stronger, whether bullish or bearish. Conversely, the ADX line declines when the trend loses strength or the market is wide.
How the Components Work Together
The three components of the ADX work in tandem to provide traders with a complete picture of market trends:
Directional Movement:
- When the +DI line is above the -DI line, it signals that the market is in an uptrend because upward momentum is stronger than downward momentum.
- When the -DI line is above the +DI line, it indicates a downtrend as downward momentum dominates.
Trend Strength:
- The ADX line rises as the trend gains strength, whether it is an uptrend or a downtrend.
- The ADX line falls when the trend weakens, indicating a potential slowdown or a shift to a ranging market.
By combining these components, traders can identify not only the market’s direction but also the trend’s intensity, enabling them to make more informed trading decisions.
Calculating the Average Directional Index
While modern trading platforms calculate the ADX automatically, understanding how it is calculated can provide deeper insights into its functionality. Here’s a simplified step-by-step explanation of the process:
Step 1: Calculate Directional Movement (DM)
- Positive Directional Movement (+DM): If the current high is higher than the previous high, the difference is recorded as +DM. Otherwise, +DM is 0.
- Negative Directional Movement (-DM): If the current low is lower than the previous low, the difference is recorded as -DM. Otherwise, -DM is 0.
Step 2: Calculate the Average True Range (ATR)
The ATR measures market volatility and is calculated as the average of the true range over a specific period (usually 14 days). The true range is the greatest of the following:
- Current high minus current low.
- Current high minus previous close.
- Current low minus previous close.
Step 3: Calculate the Directional Indicators
- +DI: Divide the smoothed +DM by the ATR and multiply by 100.
- -DI: Divide the smoothed -DM by the ATR and multiply by 100.
Step 4: Calculate the ADX
- The ADX is derived by taking the absolute difference between +DI and -DI, dividing it by their sum, and smoothing the result over a set number of periods.
Applications of ADX in Trading
The ADX is a dynamic tool used in various trading strategies. Here are some of its most common applications:
- Identifying Strong Trends
Traders often use the ADX to confirm whether a market is trending. A value above 25 indicates a strong trend, making it suitable for trend-following strategies.
For example:
- If the ADX is at 30 and the +DI is above the -DI, it suggests a strong uptrend.
- If the ADX is at 30 and the -DI is above the +DI, it suggests a strong downtrend.
- Avoiding Sideways Markets
Sideways markets can lead to losses due to false signals. By avoiding trades when the ADX is below 20, traders can minimise unnecessary risks.
- Combining ADX with Other Indicators
The ADX is most effective when used alongside various indicators, like moving averages, Bollinger Bands, or RSI (Relative Strength Index). For instance:
- A trader might use the ADX to confirm trend strength and RSI to identify overbought or oversold conditions.
- Trend Reversals
While the ADX does not directly indicate reversals, a declining ADX can signal weakening trend momentum, which might precede a reversal.
Real-World Example of ADX
Let’s consider an example using the S&P 500 Index.
- In a period where the S&P 500 was trending upward, the ADX rose above 25, confirming a strong uptrend. Traders who entered long positions during this phase could have capitalised on the upward momentum.
- Conversely, during a sideways market phase where the ADX remained below 20, traders could have avoided entering positions, thus reducing losses from false breakouts.
Frequently Asked Questions
Objectivity: The ADX quantifies trend strength, reducing reliance on subjective analysis.
Versatility: It works across various markets, including stocks, forex, and cryptocurrencies.
Complementary Tool: The ADX enhances other indicators by confirming trend strength.
- Lagging Nature: The ADX is a lagging indicator that reacts after a trend has started.
- No Directional Bias: It measures trend strength but does not show whether the trend is bullish or bearish.
- Choppy Markets: The ADX may generate false signals in volatile, sideways markets.
The ADX is particularly useful for identifying strong trends in the highly volatile cryptocurrency market. For instance:
- During Bitcoin’s bull runs, the ADX often rises above 25, confirming the trend’s strength.
- During periods of consolidation, the ADX remains below 20, signalling a lack of trend.
Professional traders often:
- Use the ADX as a confirmation tool alongside other indicators.
- Adjust the ADX period based on their trading strategy (e.g., shorter periods for intraday trading).
- Monitor the ADX for trend continuation or weakening signals.
Day traders typically use shorter ADX periods (e.g., 10–14) to capture quick trend changes. By focusing on intraday charts, they can:
- Enter trades when the ADX rises above 25.
- Exit trades when the ADX starts declining, indicating weakening momentum.
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It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. 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It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. 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Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. 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Distribution income increased by 18.5% year-on-year, outpacing DPU growth due to an expanded unit base following equity fund raisings to finance recent acquisitions. Rental Market Dynamics and Portfolio Performance The REIT maintained healthy rental reversions at 10% during the first half, though second-quarter reversions moderated to approximately 5% compared to the exceptional 51% recorded in the first quarter. Looking ahead, rental reversions in the second half are expected to be higher, supported by the Gore Hill Data Centre lease renewal where rents more than doubled and will contribute from the third quarter onwards. Portfolio occupancy declined to 92.5% from 95.6% in the first quarter due to the expiry of the Cardiff Data Centre contract. Despite this decrease, the earnings impact should be limited as 95% of revenue-generating power capacity remains contracted. 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Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. 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Financial costs provided additional support, declining 16.6% year-on-year to S$37.8 million. The average cost of debt improved from 4.2% to 3.6%, whilst interest coverage strengthened to 2.8 times from 2.6 times previously. Investment Outlook and Recommendation Phillip Securities Research maintains a BUY recommendation with an unchanged dividend discount model-based target price of S$0.45. The REIT trades at a forward dividend yield of 6.2% and price-to-net asset value of 0.57 times. Expected catalysts include accretive redeployment of divestment proceeds into Salesforce Tower, successful backfilling of Deloitte's 150,000 square feet space at OUE Downtown at market rents, and continued cost savings from refinancing S$400 million of debt maturities due in 2027. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. 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Company Overview SIA Engineering Co. Ltd (SIAEC) is a leading aircraft maintenance, repair and overhaul (MRO) service provider operating across the Asia-Pacific region. The company provides comprehensive maintenance services including airframe and line maintenance, engine and component services, with operations spanning Singapore, Malaysia, Cambodia, the Philippines, India, and recently China through strategic joint ventures. First Quarter Performance Analysis SIAEC reported a 6.1% year-on-year decline in first quarter FY27 profit after tax and minority interests to S$40.3 million, representing 22% of the full year estimate. The earnings decline was primarily attributed to a S$7 million reduction in share of profits from the engine and component segment, driven by higher investment costs associated with the SAESL joint venture. Associates and joint venture income fell 18% year-on-year to S$31 million, with the engine and component segment declining 19.2% due to elevated investment costs. However, this was partially offset by the airframe and line maintenance segment, which posted a 14.3% year-on-year increase driven by growth in flight handling volume, which rose 2.9% year-on-year. Core Business Resilience Evident Despite the headline revenue decline of 8.6% year-on-year to S$327.6 million, the underlying business fundamentals remain intact. The revenue drop was attributed to the scope and work content performed during the quarter, with lower materials-related work being conducted. Heavy checks performed decreased 13% to 20 checks, whilst managed fleet size for components revenue fell 9% to 151 aircraft, indicating reduced parts-intensive work during the period. Importantly, operating profit surged 159% due to lower material costs and reduced outsourced repair costs. Ex-materials revenue grew 4.2% year-on-year, demonstrating that direct labour-related revenue increased, with line maintenance operations handling 2.9% more flights year-on-year to 40,615 flights. Strategic Positioning and Outlook Phillip Securities Research maintains its BUY recommendation with an unchanged target price of S$4.06. The research house highlights SIAEC's strengthening position in the Indian MRO market through Air India partnerships, regional maintenance capacity expansion across Southeast Asia, and market entry into China via the Arport AME joint venture. These strategic initiatives position the group to capture growing APAC MRO demand. Investment costs at SAESL are expected to peak during the current financial year. The stock trades at a FY27 estimated price-to-earnings ratio of 19.9 times. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. 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Singapore REITs Poised for DPU Growth in First Half 2026 Amid Lower Interest Rates
Market Performance and Outlook Singapore Real Estate Investment Trusts (S-REITs) demonstrated modest resilience in June 2026, with the S-REITs Index gaining 0.4% following May's 1.6% decline. The sector is positioned for stronger performance ahead, with analysts expecting approximately 3% year-on-year distribution per unit (DPU) growth for the second quarter of 2026, driven by improved net property income from higher rents and reduced financing costs in a lower interest rate environment. Sector Dynamics and Interest Rate Environment The average cost of debt for S-REITs has declined by approximately 40 basis points year-on-year as of end-March 2026, with expectations of a further 10 basis points reduction throughout the remainder of the year. This improvement is supported by refinancing opportunities at lower Singapore Dollar benchmark rates, particularly benefiting REITs with substantial SGD-denominated debt portfolios. The 3-month Singapore Overnight Rate Average (SORA) has stabilised around 1.1%, remaining approximately 100 basis points below levels from a year ago. However, overseas interest rates have begun to edge higher amid expectations of renewed inflationary pressures from the ongoing Middle East conflict. The Reserve Bank of Australia, European Central Bank, and Bank of Japan have all raised policy rates this year, suggesting that borrowing costs for foreign currency-denominated debt will gradually increase, though existing interest rate hedges should cushion the impact. Sectoral Performance and Investment Strategy The diversified REIT sub-sector led performance in June with a 3% gain, while the overseas commercial REIT sub-sector declined 6.5%. Retail, office, and industrial REITs are expected to continue delivering mid- to high-single-digit rental reversions, though hospitality REITs face softer operating performance due to higher airfares and travel disruptions from Middle East conflicts. Analysts maintain an overweight stance on S-REITs whilst remaining selective, favouring REITs with robust balance sheets, defensive earnings profiles, and higher proportions of fixed-rate debt to limit interest rate volatility exposure. Retail S-REITs remain preferred, supported by healthy tenant sales and limited new supply, which should underpin mid- to high-single-digit rental reversions in 2026. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. 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Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. 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Strong First Half Performance Driven by Singapore Assets Suntec REIT delivered robust first-half results with distributable per unit (DPU) of 3.936 Singapore cents, representing a substantial 24.8% year-on-year increase. This performance aligned with analyst expectations and constituted 52% of the full-year forecast. The growth was primarily attributed to an S$9.4 million (11.6%) reduction in finance costs and enhanced contributions from the Singapore office and retail portfolios. Company Overview Suntec REIT is a Singapore-based real estate investment trust that owns and manages a diversified portfolio of office, retail, and convention properties. The trust's flagship assets include Suntec City, Marina Bay Financial Centre properties, and overseas holdings including The Minster Building and 55 Currie Street. Singapore Portfolio Maintains Near-Full Occupancy The core Singapore operations demonstrated exceptional resilience, with both office and retail portfolios achieving near-full occupancy rates of 99.5%. The office portfolio recorded strong positive rental reversions of 10.1%, whilst the retail segment achieved even stronger rental growth of 10.7% during the first half. Analysts expect healthy rental reversions to continue, forecasting 5% for the office portfolio and 10% for retail in the full year. Key Positive Drivers The Singapore operations remain the primary earnings driver, with office occupancy rising 0.7 percentage points quarter-on-quarter to 99.5%. This strong performance is supported by limited core CBD supply and tight market vacancy, with demand coming from financial services and technology sectors. The retail segment benefited from major events including the F1 Singapore Grand Prix and BTS concert, which supported tenant sales growth of 7% in the first half. Tenant sales growth was primarily driven by food and beverage outlets, whilst discretionary retail remained resilient. Suntec Convention is expected to maintain stable performance with a healthy MICE pipeline providing support despite Middle East conflict uncertainties. Financial Position and Outlook Aggregate leverage increased to 43.0% from 41.6% following the redemption of S$150 million in perpetual securities. Phillip Securities Research maintains an ACCUMULATE recommendation with a raised target price of S$1.69, up from the previous S$1.63. The trust currently trades at an FY26e dividend yield of 5.45% and price-to-NAV of 0.72x. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. 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