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Average Directional Index ADX

 

Average Directional Index ADX Indicator Purpose


Average Directional Index (ADX) is a technical indicator developed by Welles Wilder to estimate trend strength without including look to tendency direction. It also determines possible price movements by comparing the difference between two consecutive lows with the difference between the highs. Wilder planned ADX with commodities and daily prices, but these indicators can also be useful for the stocks too.



Average Directional Index ADX Indicator Usage


ADX is a complex indicator. The Average Directional Index (ADX), Minus Directional Indicator (-DI – red line) and Plus Directional Indicator (+DI – green line) represent a set of directional movement indicators that figure a trading system developed by Welles Wilder. Used together, chartists can determine both the direction and strength of the trend.
Commonly the ADX indicator is supposed to reveal current trend strength:

  • Growing ADX (usually rising above 25) suggests strengthening market trend. The trend following indicators are becoming more useful,
  • Falling ADX suggests the trend development is doubtful. ADX values below 20 may indicate neutral trend. Oscillators are becoming more useful.

The complex of ADX trading system may require additional confirmation signals:

  • Normally if +DI (green line) rises above -DI (red line), a BUY signal is generated;
  • Normally if -DI rises above +DI, a SELL signal is generated.




Average Directional Index ADX Indicator Calculation


ADX = MA [((+DI) – (-DI)) / ((+DI) + (-DI))] x 100;


Where:


+DI – Plus Directional Indicator;
-DI – Minus Directional Indicator.

 

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