ADX - Average Directional Index

The Average Directional Index (ADX), also referred to as the Average Directional Movement Index, is an averaged combination of two directional indicators:  the Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI). 

ADX - Average Directional Index

The Average Directional Index (ADX), also referred to as the Average Directional Movement Index, is an averaged combination of two directional indicators:  the Plus Directional Indicator (+DI) and Minus Directional Indicator (-DI).   The Average Directional Index provides a measure of trend strength while +DI and -DI complement the ADX by defining trend direction.  

The Average Directional Movement Index was developed by Welles Wilder.  The Directional Movement indicators were featured in his 1978 book New Concepts in Technical Trading Systems.


ADX - Average Directional Index Calculation

The Average Directional Index is calculated using the following steps:

1. Calculate the 14-day smoothed True Range (TR) and Directional Movement indicators (+DM and -DM). 

2. Calculate the 14-day Directional Indicators  (+)DI and (-)DI:

Calculation of the 14-day Plus Directional Indicator (+) DI

3. Calculate the Directional Movement Index (DX):

Calculation of the Directional Movement Index (DX) 

4. Calculate the Average Directional Index:

Calculation of the Average Directional Index (ADX)

ADX - Average Directional Index Interpretation

The Average Directional Index is as an oscillator that fluctuates between 0 and 100. At its most basic use, the ADX can determine if a security is trending or not. This determination helps traders choose between a trend following system or a non-trend following system.

Low readings (below 20), indicate a weak trend and high readings (above 40) indicate a strong trend as shown in the following price chart. 

Price chart with Average Directional Movement Index (ADX) and directional Movement Indicators drawn below

ADX has a fair amount of lag due to the smoothing techniques. Many technical analysts use 20 as the key level for ADX but this level will usually require adjustment based on the characteristics of the security.



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