ADX Extreme Zones + Divergences

The ADX Extreme Zones + Divergences indicator monitors trend strength and potential market reversals by highlighting extreme ADX readings and identifying divergences between price action and the ADX line. This tool is designed to identify long-term tops and bottoms based on high-intensity trend exhaustion and momentum shifts.

Usage

The Usage section describes how the script can be used to identify trend exhaustion and reversal setups.

• Extreme Zones: The script highlights the ADX line when it reaches a user-defined extreme level (defaulting to 60). According to technical analysis principles, readings above this level are rare and often signify a climax in buying or selling pressure, suggesting a potential top or bottom is near.
• Regular Divergences: These occur when the price makes a new high/low that is not confirmed by a corresponding new high/low in the ADX. A regular bullish divergence (lower price low, higher ADX low) indicates weakening bearish momentum, while a regular bearish divergence (higher price high, lower ADX high) indicates weakening bullish momentum.
• Hidden Divergences: Users can enable hidden divergences to identify trend continuation opportunities. These occur when the ADX makes a new high/low that is not matched by price, suggesting the underlying trend strength remains intact despite a temporary price pullback.
• Trend Confirmation: The indicator includes an optional "cutoff" line (default 40) to distinguish between strong trending environments and range-bound or maturing trends.

Details

The script is based on concepts described by Larry Williams regarding trend strength measurement. Unlike directional oscillators, the ADX measures the intensity of a move regardless of direction.

The divergence engine uses a pivot-based logic to compare price swings with ADX swings. These signals are confirmed after a specific number of bars (defined by the "Pivot right bars" setting). If "Fast pivot confirm" is enabled, the script forces a one-bar confirmation for faster responsiveness, though this may lead to signal adjustments until the price action stabilizes.

Settings

ADX

• DI length: Sets the smoothing length for the +DI, -DI, and directional movement components.
• ADX smoothing: Sets the period for the final ADX smoothing stage.

DI Lines

• Show +DI / -DI line: Toggles the visibility of the individual Directional Index lines.
• DI colour / width: Customizes the visual appearance of the DI lines.

Levels

• ADX extreme (highlight ≥): Defines the threshold where the ADX line changes color to signal extreme trend intensity.
• ADX cutoff (line): Defines a reference level for a secondary trend threshold.
• Show cutoff / extreme line: Toggles horizontal reference lines on the pane.

Extreme zone fill

• Fill ADX extreme zone: Toggles a translucent background fill when ADX is above the extreme threshold.

ADX divergence

• Show ADX divergences: Master toggle for all divergence markings.
• Pivot left / right bars: Determines the number of candles required on either side of a peak or trough to confirm a pivot.
• Min / Max bars between pivots: Sets the required distance between two pivots to qualify for a divergence.
• Sensitivity %: Sets the required percentage separation between consecutive pivot legs to filter out noise.
• Fast pivot confirm: Enables 1-bar confirmation for pivot detection.
• Regular / Hidden Bullish / Bearish: Individual toggles for different divergence types and their respective colors.

Display

• ADX normal / extreme: Sets the colors for the ADX line based on whether it is below or above the extreme threshold.

FAQ

How do I interpret the ADX line changing color? The color change indicates the ADX has reached the "Extreme" level (default 60). This suggests the current trend is exceptionally strong and may be reaching a point of exhaustion.

Why did a divergence signal disappear or shift? The divergence engine is pivot-based, meaning it requires "right bars" to confirm a peak or trough. Signals are only finalized once the required number of bars has passed.

How can I get access to this indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.